tax report - alston & bird · ipt august 2011 tax report 3 president’s corner i look forward...

Property TaxAfter a Long Montana Winter, a Chill Remains: Pacifi corp v. Department of RevenueIn Pacifi corp v. Department of Revenue, the Supreme Court of Montana has upheld the use of industry-wide earnings-to-price ratios for the development of a capitalization rate for a regulated electric utility, determined that the Department of Revenue is not statutorily required independently to test for obsolescence, and approved reliance on a sale of stock in the taxpayer that did not occur until many months after the valuation date. These rulings were arguably not necessary to the ultimate disposition of the case, but are now likely to be given precedential effect.

Robert S. Goldman, Esq.Madsen Goldman & Holcomb, LLPTallahassee, FloridaPhone: [email protected]

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Excerpt from Elk Hills Power LLC AmicusLetter to California Supreme CourtIPT fi led the attached amicus letter in this important case with the California Supreme Court. The lower court decision would wrongly allow the inclusion of intangibles values in the ad valorem taxation of personal property used in a going concern.

Mardiros H. Dakessian, Esq.John Messenger, Esq.Mike Shaikh, Esq.Reed Smith LLPLos Angeles, CA


President’s Corner . . . . . . . . . . . . . . . . . . . . . . . 3Counsel’s Corner . . . . . . . . . . . . . . . . . . . . . . . . 4CMI Candidate Connection . . . . . . . . . . . . . . . 28CMI Corner . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28Sales and Use Tax Symposium . . . . . . . . . . . . 29Property Tax Symposium . . . . . . . . . . . . . . . . . 30Intermediate Personal Property Tax School . . .31Value Added Tax Symposium . . . . . . . . . . . . . . 31Income Tax Symposium . . . . . . . . . . . . . . . . . . 32Credits and Incentives Symposium . . . . . . . . . 32Property Tax Calendar . . . . . . . . . . . . . . . . . . . 33Code of Ethics . . . . . . . . . . . . . . . . . . . . . . . . . 33Michigan & Georgia One-Day Tax Seminars . .33 Career Opportunities . . . . . . . . . . . . . . . . . . . . 34Calendar of Events . . . . . . . . . . . . . . . . . . . . . . 36

In this Issue

Tax ReportInstitute for Professionals in TaxationExcellence Through Tax EducationAugust 2011

Intermediate Personal Property Tax SchoolAtlanta, Georgia ~ October 16 - 21, 2011Program Registration Hotel Reservation

Credits and Incentives

Income Tax

Property Tax as an Economic Development ToolThis article describes the role of property tax abatements as a tool for steering economic development and describes a number of state and local abatement, credit and incentive programs now being used.

By Mary Faye LaFaver and Brandon Pyers


No Customers? No Nexus? No Problem?In the case of Griffi th, etc. v. ConAgra Brands, Inc., the West Virginia Supreme Court of Appeals will consider whether a physically-absent intangible holding company (IHC), licensing trademarks and trade names to both related and unrelated national consumer product manufacturers, none of which had retail customers or facilities in West Virginia, may still be subject to income and franchise tax there. The following article will discuss how, in seeking the reversal of a lower court ruling that the IHC was not taxable in the state, the West Virginia Department of Revenue has asserted that the IHC had substantial economic nexus with the state because its royalty income was measured by its licensees’ sales of products, bearing those trademarks and trade names, to their customers which, in turn, sold some of those products in West Virginia.

Michael E. Caryl, Esq.Bowles Rice McDavid Graff & Love LLPMartinsburg, West VirginiaPhone: [email protected]


Outsourcing the Department’s Discretionary Authority to Make Transfer Pricing Adjustments: Arbitrary and CapriciousStates have recently started to use third party contract auditors to conduct transfer pricing audits of taxpayers. Such audits have resulted in large assessments made pursuant to the states’ “discretionary authority” (i.e., the right to adjust taxpayer’s income and other tax calculations to come up with a “fair” tax liability). This article discusses the use of third party contract auditors in the transfer pricing arena as well as some of the issues that arise during such audits.

Kendall L. Houghton, Esq. and Maryann H. Luongo, Esq.Alston & Bird LLPWashington, D.C.Phone: [email protected]@alston.com


Income Tax

mailto:[email protected]




IPT August 2011 Tax Report 2

IPT OFFICERS:PresidentLinda A. Falcone, CMI Ryan, LLC

First Vice PresidentPaul A. Wilke, CMI Weingarten Realty Investors

Second Vice PresidentArlene M. Klika, CMISchneider National, Inc.

IPT BOARD OF GOVERNORS: Immediate Past PresidentRobert D. Butterbaugh, CMIErnst & Young LLP

Kyle CaruthersThe Coca-Cola Company

Gwendolyn S. Evans, CMIRaytheon Company

Christopher S. Hall, CMI, CMAFord Motor Company

Donna L. Jernigan, CMI, PEExxon Mobil Corporation

Kenneth R. Marsh, CMITransCanada Pipelines Limited

William J. McConnell, CMI, CPA, Esq.General Electric Company

Chris G. Muntifering, CMIGeneral Mills, Inc.

Kellianne M. Nagy, CAETime Warner Cable

Andrew P. Wagner, Esq., CPAFedEx Corporate Services

GENERAL COUNSEL:Edward Kliewer, III, Esq.Fulbright & Jaworski L.L.P.

EXECUTIVE DIRECTOR:Billy D. Cook

DEPUTY EXECUTIVE DIRECTOR and STATE TAX COUNSEL:Cass D. Vickers, CMI, Esq.

ASSISTANT EXECUTIVE DIRECTORS:Brenda A. Pittler Charles Lane O’Connor

This publication is designed to provide accu-rate information for IPT members and other tax professionals. However, the Institute is not en-gaged in rendering legal, accounting, or other professional services. If legal advice or other expert assistance is required, the services of a competent professional should be sought. Re-print permission for articles must be granted by authors and the Institute. Send address changes and inquiries to Institute for Professionals in Taxation, 1200 Abernathy Road, Northeast, Building 600 Suite L-2, Atlanta, Georgia 30328 Telephone (404) 240-2300. Fax (404) 240-2315.

The War in CaliforniaOnline Retailers Push Public Initiative This article describes recent California legislation requiring online merchants to collect state use tax if they either make “click through” referral arrangements on a compensated basis with persons in California or have affi liates performing services related to tangible personal property they are selling into the state. It also describes a public referendum initiative commenced by Amazon that would let voters decide whether to repeal the law and the efforts of various mainstreet retailers that are physically present throughout the nation to require online sellers to collect tax on Internet sales.Cass D. Vickers, CMI, Esq.IPT Deputy Executive Director and State Tax CounselPhone: [email protected]


Sales and Use TaxThe European Union and Remote Sellers – No Quill RequiredWhile the US continues its long and (in)glorious legal war over nexus and remote sellers, many “Main Street” businesses are looking to Washington D.C. for solutions. At the heart of any federal solution is overturning Quill and removing the physical presence requirement. But before any solution is proffered by Congress, Main Street and Remote Sellers should study the European Union and how remote sales are taxed between the various Member States. While on the surface the EU rules appear to “level the playing fi eld,” the application may not support such a conclusion. Kenneth W. Helms, CMIRyan, LLCAtlanta, GAPhone: [email protected]


Value Added Tax

Attention: Authors and Authors in Waiting

Tax Report Articles Sought

A lanky, unkempt rail-splitter from Illinois graced us with the compelling and memorable statement that our nation was “conceived in

liberty, and dedicated to the proposition that all men are created equal.” A Mississippi riverboat pilot gave us the wisdom that “a man cannot be comfortable without his own approval.” “Forever is composed of nows,” mused a reclusive Massachusetts poet who claimed the hills, the sundown and a dog as her only companions. An orphaned Bostonian intrigued us with the notion that “all that we see or seem is but a dream within a dream.” In these and a thousand like instances, our lives were enriched because a writer shared of himself, his experience, his thoughts, his views. There is an author in each us, a voice ready to speak, with something to say from which others would benefi t. Had we been around at the time, the IPT Tax Report might not have been fortunate enough to attract contributions from Lincoln, Twain, Dickinson or Poe–but we would have asked. As we ask you now to consider preparing an article discussing developments or issues in the profession you have chosen for your life’s work. If your piece is not quite timeless, the effort will nonetheless be very much appreciated by your colleagues in and outside IPT–people whose daily lives turn to and on state and local tax matters. Become part of the SALT literati–contact Cass Vickers by email at [email protected] and give us all a piece of your mind.





PRESIDENT’S

CORNER

I look forward to serving as your IPT President for the 2011-2012 term. Thank you for expressing your confi dence in me by electing me to the position. It

is a sincere pleasure to be part of this active, growing, and progressive group of tax professionals who are dedicated to the education and certifi cation of its members, and to the professionalism of the state and local tax fi eld.

Robert D. Butterbaugh, CMI, Immediate Past President, completes a very active term. In addition to continuing many initiatives already in place, Bob has led the Institute’s expansion into the fi eld of Credits & Incentives. Under his leadership, the fi rst Credits & Incentives Symposium has been planned and will take place in November 2011. In addition, Bob put in place the fi rst Signature Sponsorship. I look forward to working with Bob in the upcoming year and seeking his valuable insight.

Congratulations to Kyle Caruthers; William J. McConnell, CMI, CPA, Esq.; and Kenneth R. Marsh, CMI, who have been elected to serve on the Board of Governors for the next three years. I am fortunate to also have Paul A. Wilke, CMI, and Arlene M. Klika, CMI, to serve as First and Second

Vice President, respectively. With returning Board members Gwendolyn S. Evans, CMI; Christopher S. Hall, CMI, CMA; Donna L. Jernigan, CMI, PE; Chris G. Muntifering, CMI; Kellianne M. Nagy, CAE; and Andrew P. Wagner, Esq., CPA, our Board continues to have a diverse and well represented leadership team. In addition, over the past several years, I have had the opportunity to work with Board member Janette M. Lohman, CMI, Esq., CPA, who recently concluded her service on the Board of Governors to whom we owe our sincere appreciation. I know that I will also be able to have the support and counsel of Past President Lee A. Zoeller, CMI, Esq. whose term of offi ce on the Board also concluded in June.

The success of the organization is due, in large part, to the many Committees and the numerous committee members that provide the time and talent to further the work of IPT. The Committee Chair appointments have been made for the 2011-2012 term and the list of Committees can be found on the IPT website. For those of you that attended the Annual Conference, you had an opportunity to express your interest in joining a Committee at the Tuesday luncheon. The table sign-up sheets have been distributed to the Committee Chairs for follow up. In addition, I encourage those who have not already expressed an interest in joining a Committee, to contact the IPT offi ce or the committee chair directly. The Intermediate Real Property Tax School Committee has expressed an immediate interest in obtaining new members.

My primary initiative in the upcoming year will be to encourage participation in IPT committees, and to coordinate the work of various committees to grow the organization and to increase its effectiveness. Gwendolyn S. Evans, CMI is chairing the newly-formed Mentoring Committee. The goal of this committee is to pair current IPT members with newer members. Berranthia Brown, CMI, Chair of the Social Networking Committee, will lead the Institute’s initiative in joining Social Media. The Mentoring, Social Networking, Membership Promotion and Public Relations (Chuck Rewis – Chair), and Networking (Arlene Klika - Chair) Committees will be working very closely, as they have overlapping goals.

As part of the overall objectives for the coming year, I would like to continue to focus on strengthening

Linda A. Falcone, CMIPresident June 2011-2012


the base of our core members in the Property, Sales and Income Tax areas. At the same time, I would also like to see additional growth in the Value Added Tax and in Credits and Incentives areas while maintaining all current IPT programs and services at the highest level of implementation. Any expansion of services or benefi ts is designed to make the Institute more purposefully oriented, forward-looking, as well as remaining responsive to the needs of the membership.

While the 35th Annual Conference recently took place, planning for the 2012 Conference in Indian Wells, California is already underway. Please mark your calendars now for June 24-27, 2012. Not only is this a very popular destination, but you will be able to participate in a program designed for all three tax disciplines. More information will be provided in future issues of the Report.

Although the calendar year is half over, the Institute has additional educational programs in all areas scheduled. Registration is currently open for the Michigan One-Day Tax Seminar, VAT Symposium, Sales Tax Symposium, Intermediate Personal Property Tax School, and the fi rst Credits and Incentives Symposium. Please visit IPT’s website for registration materials. Registration will begin shortly for the Property Tax and Income Tax Symposia and the Georgia One-Day Tax Seminar.

In closing my fi rst President’s Corner, I would like to remind you that this is your organization, and the Institute continues to hold to that basic premise. Please call on us if there is something that we have overlooked or if you have suggestions or recommendations on how to better serve the membership. I appreciate your continued commitment to the Institute and look forward to the year ahead.

Linda A. Falcone, CMIPresident

COUNSEL’SCORNER

Credits and Incentives

Property Tax as an Economic Development ToolBy Mary Faye LaFaver and Brandon Pyers

Property tax implications, current and projected, are a major factor in the ongoing operating cost equation for companies that are making

decisions around expansions and relocations. While residential property values have been in steep decline, property taxes on business property increased 1% this year, totaling US$249.5 billion in FY2010, which is equivalent to 40.3% of total state and local business taxes. Property taxes represent the top tax burden for business with sales and use taxes following at 20.1% and income tax representing only 5.3% of the overall tax burden on business. The property tax and a signifi cant portion of sales taxes paid by business are taxes on capital invested within a state.1 As declining residential property values in many parts of the country may shift additional property taxes to business, there are a variety of mechanisms throughout the country to help counter this trend and make communities more competitive for expansion and relocation projects.

Many state and local governments have found property tax abatements, rebates, or reductions an effective means to incent targeted investment behavior. These tools are used to attract a specifi c type of investment or to induce investment in comparatively undesirable areas that are more challenging to develop or redevelop. These are an effective inducement because the benefi ts are (1) an “above the line” savings to company fi nancials making the value more immediate; (2) predictable and provide ongoing savings to the company for the term of the abatement; and (3) tend to have minimal “claw-backs” attached because they are performance-driven in that the company has to be

Continued on page 5


in business and paying property tax for the benefi t to apply.

Types of Property Tax Benefi tsTax abatements are defi ned as a pre-approved reprieve from a tax obligation. The amount of the reduction varies from partial to complete according to the terms of the agreement that is reached between the taxing jurisdiction and the taxpayer. As a general rule, the governing body must adopt a resolution or enact legislation defi ning the conditions under which such consideration will be made for a taxpayer. Oftentimes, there must be enabling legislation enacted at the state level to allow the local jurisdictions to provide the benefi t.

Interestingly, this specifi c incentive takes varying forms from one state to another. Property tax programs differ in the role of the local taxing jurisdiction, the participation or approval required by a state authority, and the use of increased revenue (rather than a reduction in revenue) to fi nance qualifi ed investments in infrastructure. A common thread is that all incentives are intended to support the redevelopment of distressed and/or blighted property and create jobs to bring renewed economic vitality to underperforming properties, neighborhoods and communities.

Similar to the economic development approach of using property tax to induce job creation and capital investment in specifi c locations, many local jurisdictions also use property tax abatement programs to assist with broader economic development or environmental policy objectives. Most common of these objectives are the redevelopment of “brownfi eld” or environmentally challenged sites and energy effi ciency and reduction programs.

The program design to secure property tax benefi ts varies and includes negotiated tax abatements, and tax increment fi nancing which is a fi nancing mechanism using all or a portion of property tax as a payment mechanism. There also are exemptions on specifi c types of property (e.g., pollution control, research and development, manufacturing, etc.). As a general rule, these are statutory exemptions and “as of right” instead of negotiated benefi ts with the potential exception of getting specifi c types of equipment involved in a project to meet the defi nitions.

Continued on page 6

Locally-Negotiated Property Tax Abatements

TexasThe Texas legislature does not have the constitutional authority to levy a state-level property tax. Thus, the only permissible property taxes are those levied by local jurisdictions. The property tax and the sales tax are the main sources of tax revenue for local governments. All privately owned property in Texas is subject to property taxation in the city, county and school district in which it is located, unless specifi cally exempted. In addition, depending on the location of the property, there are several special district property taxes that may apply, such as hospital and/or junior college district taxes.

Incorporated cities, counties and special districts are allowed to enter into tax abatement agreements pursuant to Chapter 312 of the Texas Tax Code; however, in general, school districts are not allowed to enter into abatements. School district taxes account for nearly half of a taxpayer’s overall property tax burden.

Texas consists of more than 250 counties and 1,000 incorporated cities. Each local taxing jurisdiction may have its own guidelines and criteria establishing minimum capital investment and job creation and/or retention thresholds in order to qualify for abatement of property taxes. In addition, some jurisdictions may require that the planned improvements must be in competition from other jurisdictions competing for the investment (i.e., competitively-sited) and require an application be fi led prior to any public expression of a fi nal location decision or any commitment to the proposed project, such as purchasing equipment or leasing property. Finally, most jurisdictions will allow abatement of taxes on real property improvements, but not all will grant abatement for tangible personal property taxes.

Massachusetts Tax Increment FinancingWhile not a “tax increment fi nancing” (“TIF”) program in the traditional sense, Massachusetts’ version of a TIF refers to a local real estate tax exemption. The property benefi t is determined by agreement between the investing company and the locality that all or part of the increased incremental value resulting from the


new construction or improvements to real property be exempted. The benefi t ranges from fi ve percent (5%) to 100 percent (100%) annually over an agreed-upon term. The tax exemption is highly negotiable and may last from fi ve years to 20 years in duration2.

A TIF requires approval by the municipality and ultimately, the Massachusetts Economic Assistance Coordinating Council – the state board responsible for the oversight and administration of discretionary tax credit awards. To receive a TIF a company must locate in one of the state’s 214 Economic Target Area communities. Each community will negotiate the term and annual value of the tax abatement(s). Certain communities are signifi cantly more aggressive than others.

TIF is usually coupled with the Massachusetts Economic Development Incentive Program (EDIP)3. Incentives offered under the EDIP include: investment tax credits on qualifi ed property (up to 40% or $30,000 per job), an abandoned building tax deduction (if facility has been 75% vacant for two or more years), and a personal property exemption. Personal property was previously exempt from taxation under the MA EDIP program. But, as a result of statutory changes, the abatement of personal property tax is now a negotiated incentive.

Pennsylvania LERTAIn Pennsylvania, the Local Economic Revitalization Tax Assistance Act or “LERTA”4 allows local taxing jurisdictions (city, school district and county) to provide a real property tax abatement incentive for commercial or industrial properties. Properties within an eligible district may receive an abatement for a period of fi ve to ten years, based on the local ordinance. This real property tax abatement program applies to improvements, renovations and new construction that are completed by a private investor.

LERTA is a highly negotiated incentive, involving multiple local entities. Any county, city, borough, incorporated town, township, institutional district, or school district may participate in this program.

Geographic Specifi c Zone Incentives

New York Excelsior ProgramThe recently adopted New York Excelsior Program (“Excelsior”) does not actually abate the property taxes associated with the new investment. Instead; Continued on page 7

it provides a state-based income tax credit equal to a declining portion of the taxes. So, it’s a win-win situation for the municipality and the private sector investor. The company gets a benefi t that effectively lowers its property tax expense but at the same time, the municipality does not lose out on the associated property tax revenue. The real property tax credit is based on the increased taxes paid on property over the year prior to certifi cation. The value of the credit is equal to 50% in the fi rst year, declining 10% annually for a fi ve-year period.

Excelsior is a highly discretionary program that was enacted in 2010 and expanded / enhanced in 2011. Excelsior provides up to four different refundable tax credits relating to (a) job creation / retention, (b) capital improvements, (c) research and development activities, and (d) property tax payments if investing companies meet specifi c job creation and retention commitments (depending on industry and project type) and capital investment thresholds. In order to qualify and gain access to the credits, companies must apply to the New York State Department of Economic Development prior to undertaking a project, providing a detailed proposal and committing to specifi c job creation and capital investment levels over a fi ve-year period. They also must demonstrate a need for the credits to induce the project (i.e., have a competitive alternative for the investment). The State reviews each proposal and determines whether an award will be made and, if so, the type and amount of credits to be awarded in each case. Project terms may range up to ten years, and tax credits will be provided in each year of the term if a company continues to comply with Excelsior requirements.

Assuming a company qualifi es and is awarded credits under Excelsior, it may receive the Real Property Tax Credit under two scenarios: (1) locating in a defi ned Investment Zone (a designated region characterized by certain levels of economic distress), or (2) meeting the defi nition of a “Regionally Signifi cant Project” and meeting higher job creation and investment thresholds. If available, the Real Property Tax Credit generally equals 50% of the real estate taxes on the property declining at a rate of 5% over a ten-year term.

Illinois Enterprise Zone ProgramAn enterprise zone is a specifi c geographic area designated by the State of Illinois5. Each zone is administered locally by a designated zone


administrator. Qualifi ed improvements to industrial, commercial, or manufacturing property within the zones may be eligible to receive a property tax abatement on the assessed value of the improvements.

To receive the enterprise zone abatement, property owners must submit a project information form to the local zoning administrator before beginning construction. Industrial projects typically have a more generous exemption period or “term” than commercial projects. However, each zone has specifi c requirements regarding the term and percentage of tax to be abated. The annualized value of the abatement will vary from year-to-year according to assessed values placed on improvements and tax rates. To determine eligibility and receive this abatement, property owners must obtain a building permit and complete a Project Information Form describing the project.

Environmental or “Green” Property Tax Incentives

New Jersey Real Property Tax Exemption for Contaminated Real Property in Environmental Opportunity Zones

New Jersey has enabled the governing bodies of local municipalities to designate one or more qualifi ed real properties as environmental opportunity zones. Real property can qualify when it meets the criteria of: 1) now being vacant or underutilized 2) in need of remediation due to discharge or threatened discharge of contaminant and 3) listed in the most recent Department of Environmental Protection publication of known hazardous discharge sites in New Jersey.

Tax exemptions were originally intended for ten years, with later extensions to 15-year terms under certain circumstances. Although titled an exemption, the property owner is still obligated to make payments in lieu of property taxes. These negotiated payment levels are phased-in over time, with payment in each subsequent year increasing as a percentage of taxes otherwise due until the difference between total of the payments in lieu and the property taxes otherwise due equal the total remediation costs for the property.

The developer or owner must fi le an application with the assessor of the municipality where the qualifi ed real property is located, accompanied by an executed Memorandum of Agreement (“MOA”) or administrative

Continued on page 8

consent order as entered into with the New Jersey Department of Environmental Protection. Upon approval, a copy of the approved application must be fi led with the State’s Bureau of Land Management Services.

LEED Property Tax IncentivesThe Leadership in Energy and Environmental Design (LEED) Green Building Rating System™ is a voluntary, consensus-based national standard for developing high-performance, sustainable buildings. LEED has become the basis of design for all federal buildings, most state buildings and many private buildings across the United States.

Members of the US Green Building Council (USGBC) developed LEED standards and rating systems for new construction, existing buildings, core and shell, and commercial interiors. LEED enables a building owner and operator to evaluate building performance characteristics and to defi ne opportunities for improvement that will result in energy, resource and water effi ciency while providing a better atmosphere for tenants and other building occupants. Through LEED certifi cation, companies may experience lower operating costs, increased value of buildings and improved resale values.

Many states are adopting incentives for LEED certifi cation as part of their efforts to increase the use of energy effi cient technologies in new construction and building retrofi ts. Five states (Maryland, Nevada, Ohio, Texas, and Virginia) currently provide real property tax abatements for high-effi ciency buildings. These states have passed legislation empowering local jurisdictions to abate a variable percentage of the assessed value of the property that has achieved specifi c LEED certifi cation standards. The abatements have been structured by the states in two ways: 1) an abatement of the entire property, directly tied to the level of energy effi ciency achieved (e.g., silver, gold, platinum, etc.); or 2) an abatement of property taxes on the incremental investment associated with obtaining LEED certifi cation.

In addition, 35 states currently offer property tax exemptions for energy effi cient systems. Beyond the property tax savings in these jurisdictions, there also are utility-based incentives that can be stacked with the property tax savings to improve the return on investment for some of these investments.


Crossroads of Property Tax and Public FinanceIn certain states, there are legal provisions which do not allow private citizens or corporations to receive property tax abatements. In these specifi c cases, bond fi nancing is used a mechanism to deliver the abatement to the company.

Bond Financing

The Georgia constitution prohibits communities from directly abating real and personal property taxes. In order to obtain property tax savings, a company must transfer the title of property associated with a project to a development authority with the company assuming the status of a lessee. Under this structure, the development authority issues an industr ial development revenue bond to the company in exchange for title to the project. The lease structure is commonly used where the bonds provide real fi nancing, as well as property tax savings. Since the development authority is not a taxable entity, the company’s only payments typically are either nominal taxes on the leasehold interest (generally equal to the amount of the school portions of property taxes), or an agreed upon fee-in-lieu-of-taxes (also generally equal to school portions of property taxes). The company can obtain legal title to the project by paying a nominal fee at the end of the term or, if the company wished to obtain title earlier, it can do so by cancelling the bonds and paying a nominal fee.

For companies that may need access to capital, the bond fi nancing provided the extra benefi t of relatively low-cost fi nancing which can, in certain cases, be guaranteed by the state.

Tax Increment FinancingTax Increment Financing (“TIF”) is a mechanism using the faith and credit of the state and/or local jurisdiction to provide front-end fi nancing for an economic development project using the “incremental increase” in property tax as the revenue stream to retire the bonds. The incremental increase is the difference between the property tax on the real estate and/or personal property at the time the project is initiated and the projected tax due on real and/or personal property once the project is operational. TIF is a negotiated benefi t and the bond repayment mechanism relies on all or part of the revenue stream for repayment.

Continued on page 9

As a result, the associated project qualifi cation and application process is likely to be more rigorous and time consuming than other traditional property tax programs. There also may be a local requirement for a special taxing district to be established such that any tax revenues from new projects in proximity to the initial project (i.e., within the TIF District) can be used to retire the initial bond offering.

All U.S. states, with the exception of Arizona have a public fi nancing program similar to “Tax Increment Financing”.

Impacts of the Economy on Property TaxWith the increasing demands on state and local governments and the sluggish economy causing lower tax collections, there are changes in the ability of some governmental authorities to continue to support economic development using property tax revenues. In some areas of the country, there is reluctance on the part of the education community (i.e., school districts) to contribute their portion of the property tax base for economic development purposes as a result of cuts in state-level aid to local district funding. Governor Jan Brewer of Arizona vetoed a piece of legislation that would have provided a property tax benefi t in addition to a state-level aid package she supported in February 2011.1 However, the overall national trend appears to be that property tax abatements will continue to be a key economic development tool, despite the “scaling back” or elimination of other business incentive programs. Because property tax abatements are largely negotiated, locally administered and performance-based, they are a fl exible tool that can be applied on a case-by-case basis to help the local community advance its unique economic development goals.

Undoubtedly, the fi nancial pressure caused by state budget cuts to local aid will make every dollar associated with new investment more valuable. The impact of each individual project will be closely scrutinized as the net economic benefi ts of capital investment and job creation are weighed against the level of tax revenue abated.

Property tax abatements can be challenging when used as an economic development tool because of

1 http://www.bizjournals.com/phoenix/news/2011/05/02/veto-of-invest-arizona-bill-could-hurt.html

http://www.bizjournals.com/phoenix/news/2011/05/02/veto-of-invest-IPT

http://www.bizjournals.com/phoenix/news/2011/05/02/veto-of-invest-IPT


the delicate balance between using public sector resources to spur economic development activity and the associated increased demand and impacts on municipal services from the associated growth. State and local government work to achieve a positive outcome for all by evaluating projects for a positive return on investment for the taxpayer dollars; specifi cally, generating growth and increased revenues from the associated project for government while supporting the initial investment decision by the company.In order to achieve the best possible result for all parties involved, consider the following when presenting an investment project to a target jurisdiction for property tax consideration:

Communicate with local stakeholders early in the 1. process by providing a high level understanding of the project and economic benefi ts.Research and utilize any statutory property tax 2. benefi ts associated with the project (e.g., pollution control, energy effi ciency equipment, etc.).Develop a compelling scenario for why the property 3. tax abatement is necessary. This can be a “but for” (i.e., but for the incentives, this project will happen elsewhere); or use of an economic impact analysis demonstrating the positive impact to tax revenues and/or the community. A heavy handed approach often alienates local stakeholders where an approach showing the “win-win” for both community and company is more readily received.Especially in a recessionary environment, 4. understand and appreciate the economic pressures the community is facing, including increased public services for facility, recent reductions in community services (police, fi re) and impacts on school district funding.Be mindful that nearly every variable of a tax 5. abatement equation may differ based on the location under consideration. It is imperative that a company is proactive and familiar with the local taxing jurisdictions’ abatement guidelines and requirements.Be prepared to accept and fully understand the 6. implications of specifi c performance benchmarks (e.g., job creation, capital investment, etc.) in agreements with localities in exchange for the investment of taxpayer dollars in the project. “Claw-back” provisions are likely to be a part of those agreements and knowing the triggers and level of recapture are critical before executing fi nal documentation.

Mary Faye LaFaverMary Faye LaFaver is an Executive Director in the National Indirect Tax Practice of Ernst and Young with an emphasis in incentives and credits. She was the Mid-Atlantic Area practice leader for more than eight years. In her National role, she coordinates with the incentive practice leaders around the country to leverage their relationships in their respective territories to secure incentive and tax benefi ts for Ernst & Young clients that are expanding or making signifi cant year-over-year capital investments. Prior to joining Ernst & Young in 1999, she held senior policy making positions in state economic development agencies for more than 17 years in Montana, Maine, and Kansas. The majority of that time was spent negotiating on behalf of the states she served on incentive packages with growing and expanding companies.

Brandon PyersBrandon Pyers is a Manager in the East Central Subarea practice for Ernst & Young in the Philadelphia offi ce, specializing on negotiated incentives. Prior to joining Ernst & Young, Brandon was a Vice President at New Landmark Group, Inc. where he led a specialized consulting practice focused on helping companies identify, negotiate and secure public tax credit and incentive programs; and had previously held senior economic development positions, developing the international business attraction strategy for the Commonwealth of Massachusetts.

(Endnotes)1. “Total state and local business taxes state-by-state

estimates for fi scal year 2010”, Ernst & Young LLP and Council on State Taxation, July 2011

2. M.G.L. 40 § 593. M.G.L. 23A § 3A – 3F4. Article VIII, Section 2(b)(iii) of the Constitution of

Pennsylvania5. 35 ILCS § 201(F)


These issues and the Montana courts’ treatment of them are discussed in sequence below, with some commentary about lessons learned.

Earnings-to-price ratios

Montana Administrative Rule 42.22.111(1) requires the use of commonly accepted methods in the valuation process, and the parties devoted much of their litigation energy to this issue. With respect to whether the use of earnings-to-price (E-P) ratios was commonly accepted, the STAB agreed with the Department, the District Court agreed with the utility (but allowed no relief), and the Supreme Court deferred to the STAB. The actual arithmetic used to derive the capitalization rate from industry-wide data is not explained in the opinion. Also not mentioned is any consideration of rate base as a valuation benchmark.

There are two dimensions to the Montana Supreme Court’s analysis of this issue. The fi rst is a brief exposition suggesting that the Department was justifi ed in using industry-wide E-P ratios to develop a capitalization rate because of the omission of needed information with the Pacifi corp tax return. However, the opinion also implies there are no other sources of information that can be used to develop a rate, and that the industry-wide study used to derive the rate was not performed solely for the appraisal of Pacifi corp. In view of the Court’s remaining treatment of the issue, discussed next, these portions of the opinion seem odd and unnecessary to a determination of whether the use of E-P ratios was commonly accepted.

The second aspect is the Court’s description of extensive expert testimony with respect to the “common acceptance” issue at the STAB. Department witnesses relied heavily on the Unit Valuation Standards of the National Conference of Unit Value States (NCUVS), which “promoted” use of earnings-to-price ratios. Additional testimony was introduced that such data is “used widely to appraise centrally assessed properties,” that it is supported in several textbooks (that were not identifi ed in the opinion), that it is also widely used by buyers and sellers. Pacifi corp’s witnesses testifi ed that none of the other states in which it operates use an E-P ratios method “like that used by the Department…,” and that several states “disfavor” the method.

With regard to the states that disfavor the use of E-P ratios, the Court drew a distinction based on what it perceived to be a feature of Montana law not present in the other states. Reading Montana Code sections 15-18-11 and 15-6-218 as requiring the Department to

After a Long Montana Winter, a Chill Remains: Pacifi corp v. Department of RevenueRobert S. Goldman, Esq.Madsen Goldman & Holcomb, LLPTallahassee, FloridaPhone: [email protected]

The snow has melted and on May 4, 2011 the Montana Supreme Court issued its decision in Pacifi corp v. Department of Revenue, 360 Mont.

259, 253 P.3d 847 (2011). It provides an intriguing example of how appraisal principles can become confused with legal principles, how deference to an administrative body can be an obstacle to arriving at a proper appraisal for ad valorem tax purposes, and how courts sometimes cannot restrain themselves from addressing issues unnecessarily.

A regulated electric utility subject to central assessment in Montana, Pacifi corp appealed its 2005 assessment to the State Tax Appeals Board (STAB), to the District Court, and ultimately to the Montana Supreme Court. Despite having prevailed on some of the issues at the STAB and the District Court, Pacifi corp was afforded no relief in either tribunal or in the State’s court of last resort. The issues presented during the course of these appeals were:

Whether Department use of industry-• wide earnings-to-price ratios to derive the capitalization rate for calculating the value indicator in the direct capitalization of income was proper, in particular, whether this was a “commonly accepted” methodology;

Whether the Department had failed • in its statutory duty to identify and adjust for obsolescence in the cost approach;

Whether the Department and the lower • tribunals could consider as probative of value a sale of the company’s stock that was announced nearly six months after the valuation date and which closed nearly a year later.

Property Tax

Continued on page 11




Finally, it is diffi cult to discern from the Court’s opinion whether Pacifi corp’s testimony was actually weak, or if the impression of weakness arises because the Court mentioned only limited excerpts from it. As both sides relied on appraisal literature, it is puzzling that there would be a dispute about the contents of the literature, a conundrum that the Court does not resolve.

Obsolescence

Montana Code Section 15-8-111(2)(b) requires the Department to “fully consider reduction in value caused by depreciation, whether through physical depreciation, functional obsolescence, or economic obsolescence” in performing the cost approach. The issue was largely framed in terms of whether the Department was required to undertake a study to determine if obsolescence existed. Again, the Court’s opinion leaves some doubt as to what occurred. The Court states that Pacifi corp did not, at an informal Department hearing, provide a fi gure for how much obsolescence had not been captured, and that the company “does not suggest on appeal that any additional obsolescence would have been found had further study been undertaken.” However, the Court also observes that Pacifi corp estimated at the STAB that there was $2.6 billion of unaccounted for obsolescence. The Court thus attributes to Pacifi corp positions that are diffi cult to reconcile, and implies that the company abandoned its position with respect to the amount of obsolescence.

In the proceedings below, the STAB found that the Department had failed its statutory duty to fully consider obsolescence, but nevertheless determined that the Department’s appraisal reasonably refl ected the taxable value based on the evidence. The District Court upheld the STAB fi nding regarding the determination that the noncompliance was essentially harmless because the post-lien date sale of the company’s stock demonstrated, to the satisfaction of the STAB and the District Court, that no additional obsolescence existed. The Supreme Court rejected the fi nding that the Department failed its statutory duty, and upheld the conclusion that there was no additional obsolescence.

Addressing the reliance on an affi rmative Department duty to study depreciation (in particular, obsolescence), the Supreme Court noted that the company had fi led FERC Form 1, which reported a deduction for depreciation that the Department had accepted. The Court also alluded to testimony that the federal defi nition of depreciation for FERC Form 1 purposes

“initially” assess the entire operating system, including intangibles, and then to deduct the intangibles, the Court observed that the laws of the other states did not mandate this process, and therefore might understandably not favor the E-P method. The Court thus read Montana statutes that require the exclusion of intangibles as though they were directing the sequence of steps in the valuation. This would be an extreme case of legislative micromanaging the appraisal process. The statutes are just as fairly read as an admonition that intangibles not be taxed.

Resolution of the confl ict in testimony provides an appropriate and defensible basis for the Supreme Court’s decision on the issue of common acceptance, without the need to interpret the statutes:

STAB sat in the best position to draw a conclusion from confl icting evidence. [citation omitted] The District Court exceeded its scope of review and second-guessed STAB’s decision. [citation omitted]. The Department’s lay and expert witness testimony, expert reports, and trial exhibits comprise substantial evidence to uphold STAB’s conclusion that the Department’s earnings-to-price ratios method of valuation has been commonly accepted in the appraisal community.

253 P.3d at 853.

Examination of this issue might end here, but it merits a few additional observations. First is the obvious: it is extremely diffi cult on appeal to overturn a fact-fi nding tribunal’s determination based on expert testimony. Second, the Court accepted without comment the proposition that the endorsement of an appraisal methodology by an organization of taxing states (NCUVS) is probative of “common acceptance.” This is another version of affording deference in matters of valuation judgment to the taxing authorities that have a vested interest in the outcome.1 A solution to this that might be considered is an increased emphasis on the benefi ts of appraisal independence in the arguments before courts and policymaking bodies.

1 The opinion also appears to have been infl uenced by the Court’s understanding that the Department’s practice of using E-P ratios was “longstanding.”



a statute specifi cally directing it to consider all forms of depreciation. If the legal valuation standard is market value, the requirement to consider all forms of depreciation in the cost approach is embodied in that standard even in the absence of a statute spelling that out. The statute may be a product of the common misconception among assessing offi cers that obsolescence is less important in the cost approach than other elements, or that they are justifi ed in presuming it does not exist and imposing the burden on the taxpayer to identify and measure it. A statute of this kind makes clear that they have no such option. The Montana Court’s decision thus dilutes a requirement that is both inherent in the valuation standard and specifi cally mandated by law.

The most solace other Montana taxpayers may derive from the opinion on this issue is its repeated assertions that Pacifi corp failed to adduce evidence to support its case. This perception by the Court obviously affected its narrative, and led it to unnecessary pronouncements of statutory interpretation that weaken the valuation standard in Montana.

Sales price

The fi nal issue was whether it was proper to consider the selling price of the company’s stock several months after the statutory lien date. The STAB found it appropriate, the District Court disagreed, and the Supreme Court agreed with the STAB. Pacifi corp adduced expert testimony that an appraiser generally may consider only information known or knowable at the lien date. The Court’s response: “We disagree.” In support of its disagreement, the Court cited a statute which provides that the actual selling price of the property may be considered. The statute makes no mention of considering the selling price of stock in the corporate owner of the property, nor does the opinion touch upon the relationship between the aggregate value of stock and the value of property owned by the company that issued the stock. Further, the opinion does not identify any testimony contrary to that of Pacifi corp’s expert.

Beyond this, the Court read the statute without regard for its context as a property tax valuation provision. One can as easily conclude that a sale even further distant in time than six months merits consideration. By the Court’s reasoning, there would be no temporal limit. But appraisers do not have this freedom, and the objective of the property tax valuation exercise is appraisal. These considerations should circumscribe

includes obsolescence, and cited the defi nition to this effect in 18 C.F.R. Part 101. Therefore, in the Court’s view, all depreciation had been taken into account. According to the Court, Pacifi corp had the opportunity to present additional evidence of obsolescence and failed to do so.

The Supreme Court’s opinion does not recite Pacifi corp’s response to the contention based on FERC Form 1. A question that might have been explored is whether it is common practice for utilities to measure obsolescence for purposes of fi ling such reports, notwithstanding the CFR defi nition. It may also be relevant that the rate base for regulatory purposes is generally net book value rather than market value. But without discussion of such matters, the Court essentially determined that reliance on the taxpayer’s own FERC Form 1 data was suffi cient to comply with the statute. The Department was not required to perform an independent analysis to ascertain the presence of obsolescence.

A concurring opinion criticizes the majority for addressing the issue of whether the Department failed to comply with its statutory duty. According the concurring opinion, the majority undertook to interpret the statute prescribing the Department’s duty, an issue not presented in the appeal by either party. However, in both opinions it is diffi cult to distinguish the questions of what the statute requires and whether the Department complied with it. Although not expressed in this way, the focus of the concurrence may be the majority’s conclusion that the Department has no obligation to look beyond the public fi lings of the taxpayer to satisfy the statutory requirement to consider obsolescence fully. Although it characterized the majority’s action as “blindsiding” Pacifi corp, the concurrence did not, however, disagree with the ultimate result that denied Pacifi corp any relief.

Whether or not the assessed value of Pacifi corp’s property was excessive, the notion that a statutory duty to measure obsolescence can be avoided based on the taxpayer’s actions is now a precedent that may have implications the Court did not intend. If the duty to assess is the duty to appraise, it cannot be the taxpayer’s fault that obsolescence was not measured unless the taxpayer denied access to requested information. Reliance upon information fi led for regulatory purposes, unconnected with appraisal or the market value standard, does not seem congruent with a legal mandate to detect and measure obsolescence for an appraisal.

It is also useful to think about what the obligations of the Department might have been in the absence of


the interpretation of the appraisal statute. It is not necessary to read it so as to confl ict with the appraisal principles it is designed to implement. Again we have language that would seem unnecessary to the decision but that can be problematic in the future. The Court repeatedly stated that there was other evidence in the record to support the assessment. That being the case, the Court could have relied on that evidence without venturing into the appraisal discipline.

Conclusion

Based on the narrative in the Montana Supreme Court’s decision is it not possible to discern whether the property of Pacifi corp was overvalued. However, it is possible to conclude that the Court had ample grounds to sustain the assessment, without embracing deference to the assessing authority and without interpreting statutes that required no interpretation in the context of this case. A simple opinion, relying only on the evidence of record, could have achieved the same result. The exuberance brought by Spring has created an unfortunate precedent.

Excerpt from Elk Hills Power LLC AmicusLetter to California Supreme Court

To the Honorable Chief Justice and Associate Justices:

The Institute for Professionals in Taxation (“IPT”) hereby supports the petition for review of Elk Hills Power, LLC. The erroneous decision of the

Court of Appeal creates a confl ict among the appellate courts as to an important tax policy issue—the property tax treatment of intangible rights and privileges. As technology continues to rapidly evolve and with it our economy, the great harm that would befall California-based businesses—and small businesses in particular—based on the lower court’s departure from established property tax principles renders this case worthy of this Court’s review.

* * *

Review of this case is warranted because the lower court’s decision has created a confl ict in the law. The seminal case in this area is Roehm v. Orange County (1948) 32 Cal.2d 280, in which this Court prohibited the inclusion of the value of intangible assets and rights relating to the going concern value of a business in the value of taxable property. This Court stated, “only the intangibles enumerated [in the Constitution and Revenue and Taxation Code] are to be regarded as personal property for purposes of taxation.” Thus, this Court held that liquor licenses must not be subject to the property tax because they were not enumerated in the Constitution or Revenue and Taxation Code. This decision was later codifi ed in Revenue and Taxation Code section 110, forbidding the taxation of intangible property. Since 1948, taxpayers have been following the principles set forth in the Roehm decision.

After the Roehm decision, California courts continued to properly disallow the inclusion of the value of intangible assets in the property tax base. GTE Sprint Comm. Corp. v. County of Alameda (1st Dist. 1994) 26 Cal.App.4th 992. In that case, the First District followed the rule in Roehm and held that the Board’s valuation of a telephone company’s property was invalid because it did not satisfactorily remove from the tax base the value of intangible assets. In that case, the Board did not consider the taxpayer’s evidence that the Board’s

Property Tax



method resulted in the taxation of intangible assets. The court cited Roehm and its progeny of cases to determine that the existence of intangible assets may be taken into account when valuing property but may not be included in the valuation when they are excludible. Thus, the court struck down the Board’s method of taxation.

Sections 110 and 212 were amended in 1995 to codify GTE Sprint. This amendment added Section 110(d), clarifying when intangible property cannot be included in the “fair market value” or “full cash value” of taxable property. The California courts continued to properly disallow the inclusion of the value of intangible assets in the property tax base under the principles of Roehm and consistent with an interpretation of Sections 110(e) and 212(c) that is consistent with legislative history and the Assessor’s Handbook published by the California State Board of Equalization (“Board”). Simply stated, California courts consistently held that intangible assets are not subject to property taxation and, although their existence may be taken into account when valuing property as a going concern, the value of intangible assets may not be included in the value of the property. Thus, when intangible assets are capable of separate assessment, the value must be expressly excluded.

Other appellate decisions followed the same principles set forth in Roehm.1 Even when the courts upheld an assessor’s valuation methodology, they made clear that Roehm still governed. Courts also made clear that the interpretation of Sections 110 and 212 that is consistent with their legislative history and the Assessor’s Handbook were also consistent with Roehm and, therefore, also governed.2

However, the Fourth Appellate District’s decision in Elk Hills leads to a result that departs from Roehm and subsequent Court of Appeal cases. The Fourth District accepts the proposition of “taking into account the value added to the [taxpayer’s] plant by the existence of the applied ERCs, when assessing the plant as a ‘going concern.’” Thus, unlike the Courts before it, the Court of Appeal in Elk Hills has adopted an interpretation of Section 110(e) that makes a nullity of the remainder of Section 110 by refusing to consider relevant legislative intent as evidenced by legislative history and the Board guidance as set forth in the Assessor’s Handbook.

1 See Shubat v. Sutter County Assessment Appeals Bd. (1993) 13 Cal.App.4th (upholding a decision by a county Assessment Appeals Board that ruled that the assessor’s methodology in-cluded certain nontaxable intangibles).

2 See American Sheds (1998) 66 Cal.App.4th 384; see also Wat-son Cogeneration Co. v. County of Los Angeles (2002) 98 Cal.App.4th 1141.

Thus, if Elk Hills is left unreviewed, it would necessarily lead to a lack of uniformity in decisions. As such, we request this Court to accept review of this case to avoid such a result.

* * *

In this case, whereas the Assessor’s Handbook clearly states that Sections 110 and 212 do not authorize adding incremental value of taxable property to refl ect the value of intangible assets, the Fourth District’s decision would allow exactly that result. The Fourth District allows an assessor to take “into account the value added to the plant by the existence of the applied ERCs, when assessing the plant as a ‘going concern.’” This clearly contradicts the Board’s own manual.

The Board’s own handbook must be given due consideration by this court, especially when it is in confl ict with the Board’s position in this case. The lower court wrongly refused to do so.

* * *

Accepting review in this case would settle an important question of law, which is a separate and independent ground for review. As this Court noted in Roehm with respect to the arguments concerning the assessment of intangibles for property tax purposes:

These contentions therefore raise questions of public importance that involve numerous rights and privileges other than legal licenses, for the characteristics that it is claimed make legal licenses taxable as property would likewise make numerous other rights and privileges taxable as property.

Roehm v. County of Orange, 32 Cal. 2d 280, 283 (1948).

While the question of taxing intangibles was of great public importance at the time of the decision of Roehm in 1948, the issue is arguably more important today given the rapid advances in technology and the evolution of our economy. Almost all businesses have signifi cant intangible property that make up a sizable portion of their properties. This decision would apply broadly beyond the taxability of the emissions reductions credits at issue in Elk Hills because as acknowledged by the trial court, the “characteristics that is claimed make” Elk Hills intangible property “taxable as property would likewise make numerous other rights and privileges taxable as property.” The



Outsourcing the Department’s Discretionary Authority to Make Transfer Pricing Adjustments: Arbitrary and CapriciousBy Kendall L. Houghton, Esq. and Maryann H. Luongo, Esq.1

Alston & Bird LLPWashington, D.C.Phone: [email protected]@alston.com

Introduction

In 2005, a small fi rm fi led a patent application with the United States Patent and Technology Offi ce (“USPTO”) for a “system and method” to “analyz[e]

tax avoidance of a taxpaying entity.” Abstract, Patent 7,716,104 B2. Application of the “computer-implemented method” was represented to identify entities that have “avoided” a state corporate income tax, based on comparison of the entity’s return on assets, capital, sales, and/or operating expenses, as compared with corresponding ratios for related fi rms operating in a predefi ned industry. In May of this year, the USPTO awarded patent number 7,716,104 B2 to Chainbridge Software, Inc. (“Chainbridge”), albeit the fi rm had already deployed its software pursuant to indirect/direct contract arrangements2 with several states in the interim, including Alabama, Louisiana, New Jersey, the District of Columbia, and more recently Kentucky.3

Section 482 of the Internal Revenue Code (“IRC”) (“Section 482”) authorizes the IRS Commissioner to

1 Ms. Houghton and Ms. Luongo practice in the areas of state tax as well as state unclaimed property/escheat law. Ms. Hough-ton recently discussed the subject of this article and related topics in her presentation, “What’s Fair about the States’ Use of Discretionary Authority?” at IPT’s 2011 Annual Conference in San Antonio, Texas. Alston & Bird LLP was the 2011 Annual Conference Signature Sponsor.

2 Chainbridge has been a subcontractor on contracts between ACS State and Local Solutions, Inc. and various states.

3 Note that other states are considering laws to permit outsourc-ing of tax audits including Minnesota (see Minnesota HF0027, introduced July 19, 2011 and HF1219).

appellate court’s erroneous decision will have an unlawful impact on most California-based businesses.

Conclusion

In sum, the Elk Hills decision contradicts this Court’s previous rulings and other appellate court interpretations of the relevant law and guidance involving the property tax treatment of intangibles. Its impact will be both far-reaching and disastrous for California businesses at a time when our economy can ill afford it. For all of the foregoing reasons, review must be granted.

Respectfully submitted,

Mardiros H. Dakessian, Esq.John Messenger, Esq.Mike Shaikh, Esq.Reed Smith LLPLos Angeles CAAttorneys for Institute for Professionals in Taxation

Income Tax






allocate income and/or deductions between or among related entities in order to clearly refl ect income; the Section 482 regulations place a controlled taxpayer on parity with an uncontrolled taxpayer by determining, according to the arm’s-length standard, the true taxable income of the uncontrolled taxpayer. Does application of patented software to a taxpayer’s fi nancial information without discussion or input from the taxpayer sound like a garden-variety/standard Section 482 transfer pricing audit to you? Perhaps at fi rst glance, but the many taxpayers that have been subjected to Chainbridge Software, Inc.’s special “black box” method of establishing an assessed liability for state corporate income tax purposes do not fi nd anything about this type of “audit” to be standard – nor do they fi nd them to be transparent, legal or fair.

Discretionary Authority: One Big StickStates’ Discretionary AuthorityState revenue commissioners wield broad powers to adjust the income, factors, deductions and expenses of taxpayers, in order to yield a “true” or “fair” tax liability. Of course, many states’ delegations of discretionary authority require that before a commissioner uses his/her discretionary authority, the commissioner must prove a distortion or improper refl ection of income to the state. However, once such discretionary authority is exercised, the courts’ deference to the resulting adjustments is diffi cult to overcome. The taxpayer that challenges such adjustments faces two specifi c hurdles: (1) an assessment is generally treated by state law as constituting prima facie evidence of a tax liability, hence the taxpayer bears the burden of proof regarding its invalidity; and (2) most state trial courts employ a standard of review that is very high, for example reversal of a discretionary adjustment may occur only where the assessment was arbitrary and capricious, or constituted a manifest abuse of discretion.4

Traditional Controls Over Abuses of Discretion As a consequence, the department’s careful exercise of discretionary authority is the only way to ensure a perception of fairness and constitutionality in its treatment of taxpayers on audit. Still, there are certain strictures that govern the use of such discretion, particularly in the arena of transfer pricing. First, many states have a statutory taxpayer bill of rights that gives taxpayers the right to obtain information about

4 The North Carolina Superior Court went further in its recent de-cision in Delhaize America, Inc. v. Hinton, where it said that ‘[i]f the offi cer acted within the law and in good faith in the exercise of his best judgment, the court must decide to interfere even though it is convinced the offi cial chose the wrong course of action.” Delhaize America, Inc. v. Hinton, Wake County Super. Ct. Docket No. 07-CVS-020801 (Jan. 12, 2011).

the tax implications of any situation or transaction as well as how the taxpayer’s liability was determined.5 Second, taxpayers are also entitled to explanation of any adjustment proposed on audit as a matter of substantive and procedural due process – without such notice of the basis for adjustments, a taxpayer is denied both meaningful notice and an effective opportunity to protest. Third, specifi cally in the transfer pricing arena, most states conform to Section 482 through rolling or static conformity to the Internal Revenue Code as a whole, and generally also through adoption of line 286 of the federal corporate income tax return (Form 1120) as the starting point to determine state taxable income.

Enter Chainbridge/Exit FairnessRather than undertaking a careful exercise of their own discretionary authority, several states have turned to Chainbridge to prepare “economist’s reports” (using the “black box”) that serve as the basis for the state’s transfer pricing adjustments. States understandably might feel intimidated by a highly technical and evolved area of tax law such as transfer pricing. However, where the state’s own audit staff has not reviewed the taxpayer’s transfer pricing, they are not able to answer detailed questions relating to the proposed assessments. The states in turn look to Chainbridge for a response. It is striking that a state revenue department would be unable, in such circumstances, to articulate or to “prove” the distortion/improper refl ection of income upon which it has premised its exercise of discretionary authority to make transfer pricing adjustments, nor could it explain the nature of the adjustments that it proposes to correct the alleged distortion; in short, the prerequisite to exercise of discretionary authority is generally ignored, especially in situations where fi nancial information is simply uploaded into a software program that spits out an assessment.

Chainbridge has jealously guarded its leverage by treating its software as “proprietary” and refusing to provide taxpayers with complete explanations of how its proposed adjustments have been generated and are justifi ed. While purporting to apply Section 482 standards in its “audits” of taxpayers, the Chainbridge method appears to make a number of baseless assumptions, including that (i) the comparable profi ts method7 (“CPM”) is the best method to examine the

5 See, e.g., New Jersey Taxpayers Bill of Rights (P.L. 1992, c.175).

6 Line 28 of IRS Form 1120 sets forth federal taxable income before net operating loss and special deductions; this fi gure embodies the application of section 482 principles.

7 The section 482 regulations specify several different methods



degree of comparability between controlled and uncontrolled transactions, when in reality there are multiple methods that may be used; (ii) every dollar of income to a company results from transfer pricing; and (iii) all transactions engaged in by a participant in related-party transactions are controlled. Such assumptions are often inconsistent with or fail to satisfy the requirements of Section 482.

Defending Against a Chainbridge-Proposed AdjustmentDepartments of Revenue (“DOR”) have generally been highly deferential to Chainbridge in audits. As a result, taxpayers have been forced to try to educate state DOR staff on the principles of a Section 482 transfer pricing audit, while simultaneously pointing out the fl aws in Chainbridge’s proposed adjustments. These fl aws, that must be demonstrated by reference to each taxpayer’s specifi c facts, and have ranged from the failure to select true comparables, which is the cornerstone of a valid 482 transfer pricing examination, to the failure to apply audited fi nancial income and balance sheet statements and to effectuate adjustments for comparability (especially when using the CPM), which are not only best practices but also required by the Section 482 regulations. Additional fl aws that have been identifi ed in select Chainbridge-issued reports include the failure to identify the related-party transactions that are being reviewed, and the failure to apply standard adjustments to improve comparability (e.g., accounting, asset intensity, level of the market, and foreign exchange adjustments).

Bridging the Gap in PerceptionsNew Jersey taxpayers have by and large been able to reach mutually acceptable resolutions of audits by the New Jersey Division of Taxation (the “Division”), due to the Division representatives’ interest in settling such disputes, and New Jersey has not renewed its outsourcing contract with Chainbridge. However, the District of Columbia is aggressively pursuing audits through its arrangement with Chainbridge/ACS.

“APAs and Beyond!” Chainbridge had at fi rst hesitated to cross swords with taxpayers whose transfer pricing was “blessed” by virtue of an Advance Pricing Agreement8 (“APA”), presumably in recognition

to determine the arm’s-length nature of intercompany transac-tions, of which the comparable profi ts method is but one.

8 The IRS’s APA program offers taxpayers the opportunity to reach agreement in advance of fi ling a tax return on the ap-propriate transfer pricing method to be applied to related-party transactions. Through the voluntary APA program, the IRS, the taxpayer, and the foreign tax jurisdiction (where relevant) agree

that an APA is reviewed and approved by the IRS.9 Therefore, if the IRS and taxpayer enter into an APA, and the taxpayer relies on the APA when completing its state return (i.e., a return that starts the calculation of tax with federal taxable income), can a state that conforms to the IRC, and more specifi cally Section 482, make an adjustment that violates the APA? It seems at the very least that states that have adopted Section 482 and its regulations should presume that the APA, which was implemented in compliance with such laws and regulations, produces an arm’s-length result. Therefore, we believe the state should be bound by an APA if one is in place and the taxpayer complied with such APA in calculating its state taxable income. However, it has been our experience that Chainbridge now views taxpayers with APAs as being an appropriate subject of “black box” adjustments despite having an APA in place,10 apparently on the theory that its patented system and method is not focused on related-party transactions per se, but on establishing a “fair profi t” – a concept that is presented as being broader in scope than “just” a transfer pricing examination.

Published Guidance Clarifi es Manner in Which NJ Transfer Pricing Discretion Can Be ExercisedComing off of its recent wave of transfer pricing audit settlements, New Jersey has now issued Technical Advisory Memorandum TAM-17 (June 6, 2011), entitled “Intercompany Transfer Pricing and Advanced Pricing Agreements.” The TAM states that “in most cases” the Division of Taxation will use Section 482 standards in audit and when adjusting items above line 28 in order to arrive at a “fair and reasonable” tax; and, where a

on the appropriate transfer pricing of certain identifi ed transac-tions. If an APA is in place, the IRS will not seek a transfer pricing adjustment for a covered transaction so long as the tax return that the taxpayer fi les for a covered year refl ects the agreed-on transfer pricing method.

9 In fact, Amendment #1 to the contract between the District of Columbia and ACS/Chainbridge (CFOPD-07-R-058, “Audit of Parent/Subsidiary and Brother/Sister Corporations”), sets forth answers to questions raised by the District, including Question 17, which asks if ACS/Chainbridge will “defend its proposed ad-justment amounts to the District if there is discrepancy between transfers pursuant to Advanced Pricing Agreement under IRC Section 482.” In response to Question 17, ACS/Chainbridge states: “An IRS approved Advance Pricing Agreement (APA) will supersede adjustments proposed under IRC Section 482 to the extent that the taxpayer is following the agreement. Receipt of an APA will typically terminate any further CNIC analysis and should be provided as early in the process as possible.”

10 Interestingly, the audit reports issued by Chainbridge look re-markably similar whether the taxpayer under audit has an APA, a transfer pricing study, or nothing in hand.


taxpayer demonstrates that it has met these standards: “Since an advance pricing agreement between the taxpayer and the Internal Revenue Service would be accepted by the Service based on Section 482 standards, and Section 482 standards are incorporated into N.J.A.C. 18:7-5.10 [the regulation outlining the Director’s discretionary authority to make adjustments to correct distortions of entire net income], the Division will take into consideration an advance pricing agreement… in the evaluation of the appropriateness of intercompany pricing and determination of a ‘fair and reasonable tax.’” Still the Division “reserves the right in particular instances to use other criteria besides an advance pricing agreement” because the statutory delegation of discretionary authority to make adjustments11 “goes beyond the scope of Section 482, Section 482 is not the only provision that relates to audits of related taxpayers, and other issues may arise in a particular audit such as ‘nexus’ rules for affi liates.” In an attempt to reassure taxpayers while putting this stake in the ground, the Division concludes with the statement that “[i]n general, [it] is pledged to ‘apply equitable principles to prevent unjust situations from occurring.’”

Audit Arbitrage Runs the Risk of Yielding Arbitrary ResultsWhere taxpayers can have a dialogue with state tax administrators concerning their specifi c facts and circumstances, and the administrators are open to reaching mutually acceptable resolutions of disputes such as transfer pricing, reassurances such as those of the New Jersey Division of Taxation will ring true. However, when state tax administrators both outsource their discretionary authority to make such adjustments, and fail to understand the nature of the proposed adjustments or the taxpayer’s objections thereto, this outsourcing exercise is much more likely to result in an arbitrary and capricious assessment – i.e., an abuse of discretion that courts of law will fi nd offensive and subject to reversal. We continue to monitor the challenges to Chainbridge-generated transfer pricing adjustments in jurisdictions such as the District of Columbia, where it seems all but certain that the arbitrary nature of such adjustments will soon be under the judicial microscope.

11 N.J.S.A. 54:10A-10.

No Customers? No Nexus? No Problem?Michael E. Caryl, Esq.Bowles Rice McDavid Graff & Love LLPMartinsburg, West VirginiaPhone: [email protected]

As the SALT community awaits the United States Supreme Court’s response to the petition for certiorari in KFC Corp. v. Iowa

Dept. of Revenue,1 what would be yet another major extension of the economic nexus principle is being pursued by the West Virginia Department of Revenue (the Department) in a case pending before that state’s Supreme Court. If the Department is successful, out-of-state businesses could be subject to West Virginia corporation net income tax (CNIT) and business franchise tax (BFT) merely because they receive a measurable economic benefi t due (regardless of entity affi liation) to the commercial activity of others in that state.2

In the case of Griffi th, etc. v. ConAgra Brands, Inc. (No. 11-0252), the Department is seeking reversal of a lower court ruling that based, on the terms of the governing statutes, on the minimal contacts standard under the Due Process Clause and on the substantial nexus prong of Complete Auto,3 an intangible holding company (IHC) was not taxable by West Virginia.4

1 KFC Corp. v. Iowa Dep’t of Revenue, 792 N.W.2d 308 (Iowa 2010).

2 In advancing its theory, the Department relied on the West Vir-ginia Court’s holding in Tax Commr. v. MBNA American Bank, N.A, 220 W.Va. 163, 640 S.E.2d 226 (2006), cert. denied, 551 U.S. 1141, 127 S.Ct. 2997 (2007). Specifi cally, the Department cited, with obvious encouragement, what the KFC Court effec-tively characterized as the MBNA Court’s groundbreaking deci-sion that physically absent businesses, deriving income from their use of intangibles in a state, had the substantial nexus constitutionally required for that state to tax such income. KFC, 792 N.W.2d at 321-322. Of course, the Court in KFC also cau-tioned against reliance on other state court rulings “that ex-pansively applied the ‘substantial nexus test’ of Complete Auto through economic impact analysis.”

3 Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977).

4 Due to space limitations, except to the extent that minimal con-tacts under Due Process is relevant to Complete Auto’s sub-

Income Tax





Like the IHCs and other taxpayers in the recent series of state court cases involving the substantial economic nexus,5 the taxpayer in ConAgra Brands (Brands) had no physical presence in the taxing state (West Virginia), and earned its income from allowing the use of its intangible personal property (trademarks and trade names) by others. Beyond those facts, the circumstances of ConAgra vary sharply from those surrounding the taxpayers in the other cases.

Specifi cally, Brands was organized by its parent, ConAgra Foods, Inc., for the purpose of more effectively managing and protecting the value of various consumer product trademarks and trade names. Brands was organized, not in Delaware, but in Nebraska, where it had offi ces and employees and paid substantial state income taxes. After acquiring the trademarks, trade names and related product recipes, formulae and processes, from its parent, other affi liates and unrelated entities, Brands licensed the use of that intellectual property back to both the related and unrelated parties.6

Under the licensing agreements, Brands allowed the licensees: (a) to use the recipes, etc. in making the products and (b) to affi x reproduced images of the trademarks and trade names to containers of the products, all at facilities outside of West Virginia. In return, the licensees paid royalties to Brands measured by a percentage of their gross receipts from the sale of their products to wholesalers and distributors throughout the United States.

stantial nexus test, this article will be confi ned to a discussion of that latter aspect of the case.

5 Alphabetically listed, to-wit: A & F Trademark Inc. v. Tolson, 167 N.C. App. 150, 605 S.E.2d 187 (2004); Am. Dairy Queen Corp. v. Taxation & Revenue Dep’t of N.M., 605 P.2d 251 (N.M. App. 1979); Geoffrey, Inc. v. S.C. Tax Comm’n, 437 S.E.2d 13 (S.C. 1993) (hereinafter, Geoffrey [SC]); Geoffrey, Inc. v. Okla. Tax Comm’n, 132 P.3d 632 (Okla. 2005) (here-inafter, Geoffrey [OK]); Geoffrey, Inc. v. Comm’r of Revenue, 899 N.E.2d 87 (Mass. 2009) (hereinafter, Geoffrey [MA]); KFC Corp. supra. note 1 ; Kmart Properties, Inc. v. Taxation & Rev-enue Dep’t of N.M., 139 N.M. 177, 131 P.3d 27 (Ct. App. 2001); Lanco, Inc. v. Dir. Of Taxation, 879 A.2d 1234 (N.J. Super. 2005) and Sec’y, Dep’t of Revenue, State of La. v. Gap (Ap-parel), Inc., 886 So. 2d 459 (La App. 1 Cir. 2004).

6 It is important to note that the Department’s contention of Brands’ taxability is not premised, in any manner, on the basis of common ownership that existed between it and some, but not all, of the licensees. Although the “unitary business” prin-ciple, which would consider such factors, was recently enacted for CNIT and BFT reporting purposes starting in 2009, it does not apply to the years in this case. W.Va. Code §11-24-13a(j), Acts 2007, Chapter 247. Moreover, no “unitary business” anal-ysis was performed as to Brands’ relationships with any of the licensees.

Further, the licensing agreements expressly gave the licensees, based on their superior knowledge of their products and markets, the exclusive control of the manner in which, and places where in the United States, they marketed and distributed their products bearing Brand’s intellectual property. None of Brands’ licensees had retail stores in West Virginia. Instead, the licensees sold their products to wholesalers and distributors who, in turn, sold those products to retailers in various states throughout the United States, including West Virginia.

Under the licensing agreements, the only infl uence Brands exercised over the licensees’ processing of the products was limited to such quality control oversight of the licensees’ operations as was needed to protect the value of its intellectual property. To the same end, Brands oversaw national advertising of its trademarks and trade names.

Despite the fact that Brands had neither physical presence, nor even customers, in West Virginia, the Department, based on an audit conducted by the Multi-State Tax Commission (MTC), issued CNIT and BFT assessments against Brands. After an administrative law judge upheld the assessments, Brands sought the judicial review that led to the assessments being set aside. In seeking relief from the lower court’s ruling, the Department argued inter alia that Brands had the substantial nexus with West Virginia, required by the dormant Commerce Clause, to allow the state to impose its tax. In doing so, the Department advanced what is surely one of the most expansive views of substantial economic nexus asserted to date.

Specifi cally, the Department claims that the lower court erred by failing to correctly apply, to Brand’s business activities, the “substantial economic presence test” recognized by the MBNA Court. In doing so, the Department effectively contends that the factual distinctions between MBNA and the ConAgra Brands case had no constitutional signifi cance.

In MBNA, the taxpayer, an issuer and servicer of credit cards, “continuously and systematically engaged in direct mail and telephone solicitation and promotion in West Virginia.”7 That was the expressed factual basis for the MBNA Court’s fi nding that the taxpayer there had the substantial economic presence in West Virginia required to satisfy that standard under controlling Commerce Clause jurisprudence and, thus, was taxable due to “its signifi cant gross receipts attributable to its West Virginia customers.”8

7 MBNA, 220 W.Va. 164, 172.

8 Id., (citing Complete Auto and Western Maryland Ry. Co. v.

IPT August 2011 Tax Report 20Continued on page 21

In sharp contrast to the taxpayer in MBNA, Brands had no customers or contracting parties in West Virginia, nor was it a party to any contract any part of the performance of which occurred in the state. It did not engage in any solicitation of West Virginia customers, whether by direct mail, telephone or otherwise. Furthermore, the “mere foreseeability,” that its licensees’ products, bearing its trademarks and trade names, might end up being sold by others in West Virginia, is not even suffi cient, under the Due Process minimal contacts standard, to fi nd that Brands was doing business there.9 That conclusion is, likewise, unaffected by Brands’ national advertising activities.10

Nevertheless, the Department argued the negative that, if Brands were not “purposefully directing its trademarks to West Virginia,” it should have excluded this state “as a potential market” for its licensees’ products bearing its trademarks and trade names. However, that view overlooks the business rationales underlying Brands’ licensing agreements, not to mention that it stands on its head the case law applying the “purposefully directed” standard under Due Process analysis.11

Specifi cally, given the express terms of its licensing agreements putting the licensees in exclusive control of such matters, Brands was legally and economically indifferent as to whether its licensees’ customers did business in West Virginia or in any other particular state, per se. Rather, it was willing to rely on its licensees’ own self-interest in promoting sales of the products in the markets wherever in the United States those interests took them..

As the lower court astutely observed, the same is true of the suppliers of the ingredients and packaging containers used by Brand’s licensees (at facilities outside of West Virginia) to process and distribute their products. Nevertheless, the Department would impose an affi rmative duty on Brands (and, effectively, on those suppliers of ingredients and containers) to

Goodwin, 167 W.Va. 804, 282 S.E.2d 240 (1981).

9 Burger King Corp. v. Rudzewicz, 471 U.S. 462, at 474 (1985), (quoting World-Wide Volkswagen Corp., 444 U.S.286, at 295 (1980)).

10 See, e.g. Siemer v. Learjet Acquisition Corp., 966 F.2d 179, 183–84 (5th Cir. 1992) (advertisements in national journals, to-gether with mailing information to Texas customers and Texas sales not suffi cient for general in personam jurisdiction), cert. denied, 506 U.S. 1080 (1993).

11 Burger King, surpa. note 9. The purposefully directed require-ment protects a defendant from being “haled into a jurisdiction ‘solely as a result of ‘random,’ ‘fortuitous,’ or ‘attenuated’ con-tacts.’” Id., at 474-75 (quoting Keeton v. Hustler Magazine, Inc., 465 U.S. 770 (1984)).

prohibit the sale, by their customers (i.e. the licensees) and their customers’ customers, of their products in West Virginia, in order to avoid the extraterritorial reach of that state’s taxing power.

Moreover, in denying the constitutional signifi cance of the differences between them, the Department also further claimed that, simply because both Brands and the taxpayer in MBNA depend for their income on the “sale of someone else’s product” in West Virginia, they both were effectively doing business here. Thus, when the Department pointed out that “without a turkey to attach the Butterball trademark to, [Brands] receives no revenue,” it also asserted, in effect, that an out-of-state farmer, who supplies the turkey to Brand’s licensee, would automatically be taxable anywhere the turkey is sold. To the contrary, if the analysis employed by the MBNA Court is to be followed, it would, instead, focus on the fact that, unlike MBNA, which had customers in West Virginia, the Respondent and the farmer did not.

Thus, perhaps recognizing Brands’ tenuous factual comparison with MBNA, the Department further argued that the MBNA Court’s express rejection, of comparisons of the issues in that case to those in Geoffrey and the other IHC cases, somehow, implied the Court’s embrace of the astounding view that the mere presence in a state of reproduced images of intellectual property “as providing a more substantial tax nexus [with the owner of such property] than that under review in MBNA.” (Emphasis added). Rather, the MBNA Court rejected the Department’s attempts, to justify the imposition of taxes on the taxpayer there, on the basis of the rulings in Geoffrey, etc., because the latter relied on the fact that physically absent taxpayers used their trade names in the taxing states to establish suffi cient nexus for tax purposes.12 Thus, the MBNA Court distinguished that case from the IHC cases because, instead of having reproduced images of its intellectual property in West Virginia affi xed to the products of others, the taxpayer in MBNA had customers there.

In fact, neither Brand’s position nor the lower court’s ruling, rested, to any degree, on Brand’s lack of physical presence in West Virginia.13 Rather, Brand’s position

12 MNBA, 220 W.Va. 163, 169, 640 S.E.2d 226, 232, note 11.

13 Indeed, it appears to be the Department’s view that actual physical presence does not automatically establish substan-tial nexus if the physically present taxpayer does not “regularly, systematically and purposefully” direct its activities at West Virginia customers. W.Va. Tax Dept. Tech. Assist. Advisory 11-002, March 28, 2011 (holding that the mere presence in West Virginia of a taxpayer’s inventory of materials for producing printed advertising circulars and catalogs, in the hands of its contract printer, and occasional visits to the printer’s West Vir-ginia facility by the taxpayer’s personnel for quality control pur-


was that, based on settled constitutional jurisprudence, it did not have minimum, much less substantial, nexus with West Virginia because it was not the party using its trademarks and trade names to do business in this state.

Clearly, if Brands is held to have had “substantial nexus” with West Virginia — merely because its royalty income is measured by its licensees’ sales (due solely to the latter’s marketing decisions) of their own products, bearing Brands’ trademarks and trade names, to wholesalers and distributors, who, in turn, sell such products to retailers in West Virginia — then the “Balkanization” of the United States economy is upon us and the restraints, intended by the Commerce Clause, have failed.

Thus, the Department’s contention that, if Brands did not want to be exposed to the extraterritorial reach of West Virginia’s taxing power, it should have prohibited, in its licensing agreements, the fl ow of its licensees’ goods into this state. Of course, those agreements do not contain such a draconian provision, denying West Virginia customers in-state access to the wide variety of consumer products bearing Brands’ trademarks and trade names, because, in entering into them, Brand relied on long-settled constitutional jurisprudence broadly defi ning the limits of state taxing power. Doubtless, the agreements between the licensees and their suppliers of product ingredients and packing containers are similarly void of any such prohibition for the same reason.

Nevertheless, in ConAgra Brands, the Department urged the Court to adopt a far more elastic concept of substantial nexus than heretofore judicially attributed to the Founders’ vision of the workings of the Eighteenth Century marketplace when the Commerce Clause was authored. Thus, to the Department, substantial economic presence should, in today’s far more complex, technology-driven economy, be based on nothing more than the measurable economic benefi ts accruing indirectly to a remote taxpayer as a result of “a sale of someone else’s product.”

That is necessary, the Department argued, because, given the intangible nature of property such as Brand’s trademarks and trade names, the place of use by others, rather than where its owner is economically, much less physically, present, should be a jurisdiction where income from such use can be taxed. However, if such indirect economic benefi t were to become the touchstone of taxation, the activities of not only second parties, but third, fourth and all parties beyond, could

poses, does not subject the taxpayer to CNIT or BFT, despite the fact that the printed advertising materials will be distributed throughout the U.S. including in West Virginia).

become relevant to the taxation, not only of the fi rst party, but of each of the others.

Furthermore, there is nothing in the Department’s theory of “indirect economic benefi t” which confi nes its application to those dealing in intangible personal property or would preclude the tax from reaching any party anywhere their indirect, but measurable, economic benefi ts can be said to have accrued. Thus, this theory of taxation would apply, not only to those in the businesses of licensing the use of intellectual property, but to all other players in an integrated, dynamic market wherever the goods or services, they are providing at any stage of the entire raw material/container producing and supplying, product manufacturing, wholesaling, distributing and retailing continuum, may be used by others.

In reality, here, unlike MBNA, none of this expansive concept of the scope of state taxing authority is necessitated by the manner in which sophisticated modern business methods may have altered the fundamental nature of economic life. Rather, the essential processes and relationships found in the functioning of the farm-to-processor-to-wholesale-distributor-to-local-store-shelf continuum (including the labeling of products with protected trademarks and trade names) were at work when, and, indeed, long before, the rulings of the United States Supreme Court, establishing the current contours of the dormant Commerce Clause, were issued. 14 On those concepts, all participants in that continuum today have relied in arranging their business operations and in entering into their commercial obligations.

That is exactly what the Founders’ vision, for a robust national, and even global, economy, grounded on free trade, contemplated when they adopted the principles, now embraced in our constitutional jurisprudence, recognizing how the dormant Commerce Clause principles limit the reach of state taxation. Now, however, subject to the clarifying potential intervention of the United States Supreme Court in KFC, the ruling of the West Virginia Court in ConAgra Brands will, once again, reveal whether that intent, and the wealth and human progress implementation of those principles has fostered, can be expected to retain their remaining vitality or, alternatively, will continue to be diminished by the inroads of a growing series of unreviewed and unfettered state court holdings.

14 E.g., Complete Auto, supra. note 3.


The European Union and Remote Sellers – No Quill RequiredKenneth W. Helms, CMIManager – Value Added TaxRyan, LLCAtlanta, GAPhone: [email protected]

AAs pressure to increase tax receipts grows, states are creating new and ever-more complicated laws and rules to capture perceived “losses” of

tax receipts due to Internet commerce. Over the last three years, states such as New York and Colorado have passed so-called “click-through,” i.e. “Amazon” laws, in an attempt to shore up their respective coffers. While New York has thus far been successful in defending its click-through provision, Colorado was not. Ultimately, if there is to be any defi nitive resolution to remote sale transactions in the U.S., the federal government must step in. However, before Congress attempts to overturn Quill, full consideration must be given to several critical issues.

First, if such legislation were to be enacted into law, how would such a law be consistently applied? Would the legislation capture all remote sellers regardless of volume or would it target only those above a mandated de minimis threshold? Would such an amount be consistent between all of the states or would the states be allowed to set the de minimis amount? If there is a threshold amount, how are transactions above and below that amount treated (taxed)? Finally, when is a remote seller required to register for another state’s tax; after reaching the threshold amount or before? While answers to all of these questions are critical to successful compliance, the U.S has but to look “across the pond” to Europe for guidance.

The European Union

BackgroundPrior to the creation of the European Union (“EU”), the 27 countries that make up the EU maintained national borders for commerce between the several nations (similar to the U.S. under the Articles of Confederation) as well as national indirect tax laws and regulations. Under the old system, commerce between the nations was complicated and costly; both in tax cost (including national duties) and compliance. The creation of the EU “removed” these national borders for commerce.

The effect was that each “Member State” eliminated import duties on intra-Community transactions (“ICT”) as well as harmonized most of their tax laws and rules (similar to the SSTA). By doing so, the compliance costs and hurdles to commerce between the Member States were greatly reduced.

Indirect taxes in the EU are governed by the EU Directives. These Directives set out general defi nitions and rules on intra-Community commerce. Within certain Directives, the “main rule,” or the specifi c Directive, has a “special rule” to control certain types of transactions covered by the main rule. These special rules may be found within the same Directive or may be covered under a separate Directive. Finally, some of the Directives allow for “derogations” (a deviation from a rule or law) at the national level for Member States. These derogations were created to allow for certain national customs and practices to be maintained by the Member State. Finally, like the U.S., the EU has an adjudication process (known as ECJ case law) to resolve challenges to both Directives and derogations. As such, when researching specifi c transactions, the hierarchy is ECJ case law, main rule, special rule then derogation.

Remote Selling/E-Commerce in the EUIn order to discuss EU rules concerning remote selling/e-commerce, a U.S. tax professional should understand the “terms of art” under the VAT Directives. These terms include:

EU Term US Term

Supply of Goods Sale

Taxable Person Registered Retailer

Non-Taxable Person Private Individual

Non-Taxable Legal Person Exempt Legal Entity

New Means of TransportNew Motorized Land Vehicle, New Water Vessel, New Aircraft

Third TerritoriesTerritories (not countries) That Form Part of the EU Customs Territory

Third Countries Countries Outside the EU

Distance Sales Remote Sales

Turnover Threshold De minimis

Excise Duty

Certain Energy Products, Alcohol and Alcoholic Beverages and Manufactured Tobacco

Value Added Tax




In addition, a U.S. tax professional should understand that the EU does not consider supplies of services as subject to distance sales rules (only sales of goods). The EU also does not consider sales of goods from a taxable person located in a Member State to another taxable person located in another Member State as a distance sale. Rather, the EU considers sales that are:

Between a taxable person and a non-• taxable person

The Seller and Buyer are located in • different Member States

The Seller delivers, or arranges for • the delivery of, the goods supplied to be distance sales subject to distance sale rules. Further, a “non-taxable” person would include:

Private individuals•

Some small businesses•

Businesses that cannot register • for VAT because their activities are exempt

Public bodies•

Charities•

If a transaction encompasses these provisions, then the Seller falls under distance selling rules. Please note that if the Seller is outside the EU (and is not required to be registered for VAT), distance sale rules do not apply (as the sale is outside the scope of the EU VAT regime).

With this information in mind, the main rule for distance sales is found in Article 33 and Article 34 of the EU Directives as stated below:

33(1) By way of derogation from Article 32, the place of supply of goods dispatched or transported by or on behalf of the supplier from a Member State other than that in which dispatch or transport of the goods ends shall be deemed to be the place where the goods are located at the time when dispatch or transport of the goods to the customer ends, where the following conditions are met:

(a) the supply of goods is carried out for a taxable person, or a non-taxable legal person, whose intra-Community acquisitions of goods are

not subject to VAT pursuant to Article 3(1) or for any other non-taxable person;

(b) the goods supplied are neither new means of transport nor goods supplied after assembly or installation, with or without a trial run, by or on behalf of the supplier. (2) Where the goods supplied are dispatched or transported from a third territory or a third country and imported by the supplier into a Member State other than that in which dispatch or transport of the goods to the customer ends, they shall be regarded as having been dispatched or transported from the Member State of importation.

34(1) Provided the following conditions are met, Article 33 shall not apply to supplies of goods all of which are dispatched or transported to the same Member State, where that Member State is the Member State in which dispatch or transport of the goods ends: (a) the goods supplied are not products subject to excise duty;

(b) the total value, exclusive of VAT, of such supplies effected under the conditions laid down in Article 33 within that Member State does not in any one calendar year exceed EUR 100000 or the equivalent in national currency;

(c) the total value, exclusive of VAT, of the supplies of goods, other than products subject to excise duty, effected under the conditions laid down in Article 33 within that Member State did not in the previous calendar year exceed EUR 100000 or the equivalent in national currency.

(2) The Member State within the territory of which the goods are located at the time when their dispatch or transport to the customer ends may limit the threshold referred to in paragraph 1 to EUR 35000 or the equivalent in national currency, where that Member State fears that the threshold of EUR 100000 might cause serious distortion of competition.

Member States which exercise the option under the fi rst subparagraph shall take the measures necessary to inform accordingly the competent public authorities in the Member State in which dispatch or transport of the goods begins.



(3) The Commission shall present to the Council at the earliest opportunity a report on the operation of the special EUR 35000 threshold referred to in paragraph 2, accompanied, if necessary, by appropriate proposals.

(4) The Member State within the territory of which the goods are located at the time when their dispatch or transport begins shall grant those taxable persons who carry out supplies of goods eligible under paragraph 1 the right to opt for the place of supply to be determined in accordance with Article 33.

The Member States concerned shall lay down the detailed rules governing the exercise of the option referred to in the fi rst subparagraph, which shall in any event cover two calendar years.

Article 33 and 34 – EU “Nexus”First and foremost, Article 33 outlines how the EU treats remote/distance sales. Unlike the U.S., sales that qualify as distance sales do not consider a physical presence as a requirement to impose a tax collection responsibility. Under Article 33(1), the place of supply, or where the sale is deemed to have occurred, is the delivery location of the customer. As such, the delivery jurisdiction determines how the transaction is taxed. However, Article 34 must be read in conjunction with Article 33 to properly determine whether or not a taxable person has a requirement to register in the delivery Member State. Under Article 34, the EU does provide protection to taxable persons by establishing a minimum amount of turnover, or threshold, required to trigger registration in other Member States.

Article 34 sets the threshold bar at €100000 or equivalent national currency (only 17 of the 27 Member States are part of the Eurozone) for any calendar year (not a trailing-12). If a taxable person surpasses the threshold in a calendar year, the taxable person is required to maintain the registration into the succeeding calendar year (see the last sentence of Article 34 above). However, Article 34(2) provides Member States the ability to reduce the threshold to €35000 per calendar year if the Member State feels that the €100000 amount materially distorts the competitive landscape of the Member State’s market. U.S. tax professionals need to understand the differences between VAT and domestic indirect tax obligations to understand the necessity of Article 34(2).

A Buyer in the U.S. can be held responsible for domestic indirect tax (payable as a use tax to the

asserting jurisdiction). Use tax can be asserted regardless of whether or not the Buyer is a registered taxpayer or private individual. Under EU ICT rules, if the Buyer is an individual or non-taxable person, there is no mechanism (or requirement) for the individual to self-assess and pay VAT. Under these circumstances, a taxable person that engages in distance selling can truly distort the competitive landscape as this seller has a pricing advantage of up to 25% compared to a taxable person registered in that Member State. So if a Member State has the ability to require registration once a certain threshold has been surpassed, how are distance sales below that amount taxed?

As counter-intuitive as it sounds, distance sales below the destination Member State’s threshold are taxed at the origination Member State’s rules and rates. As an example, assume a United Kingdom taxable person making a distance sale into Germany:

Distance Sales < Threshold Amount

Now consider the same transaction but after the UK taxable person has surpassed the threshold amount for DE:

Distance Sales > Threshold Amount

UK Taxable Person

FR Non-Taxable Person

Goods €100

VAT (UK - 20%) €20

Total €120

UK Taxable Person

DE Non-Taxable Person

Goods €100

VAT (DE - 19%) €19

Total €119



requirement of physical presence. The EU solution also appears on the surface to protect “mom-and-pop” and small businesses by setting a material threshold for registration requirements. However, many remote sellers would argue that they are being punished, through additional compliance complexities and costs, simply because they have a successful business model. In addition, while there is some tangible linkage between being subjected to a jurisdiction’s rules and a tangible benefi t (such as police and infrastructure) received by the remote seller in the U.S., the distance sale rules in the EU rules seem to completely ignore a direct effect. Finally, and potentially most telling, the tax policy of the EU is adversely impacting the consumer’s ability to make commercial choices as remote sellers affi rmatively manage their tax compliance footprint by simply refusing to accept business outside certain Member States.

As the transaction on the previous page demonstrates, after a taxable person in another Member State surpasses the threshold amount, the taxable person is required to register and immediately begin charging and collecting the VAT of the delivery Member State. As such, it is imperative that the taxable person maintains accurate and up-to-date records so that the taxable person can maintain proper compliance.

A few fi nal notes regarding EU VAT compliance – Member States outside the Eurozone can require that the VAT liability be charged in local currency or equivalents (with a conversion rate stated on the invoice). However, the VAT liability may be paid only in the Member State’s currency, not equivalents. As such, a taxable person making distance sales into Member States outside the Eurozone can face FX exposure on top of signifi cant costs to produce the delivery Member State’s VAT return. For taxable persons that are not multi-lingual, please take heed that each Member State’s VAT return is in the national language of the Member State.

Managing Registration RequirementsIn a 2009 Memo by the European Commission (“EC”), the EC conducted a “secret-shopper” survey of the top 100 items purchased by citizens of the 27 EU Member States. The survey documented that only 39% of the attempted purchases could be attempted on websites located in a Member State other than the Member State of the purchaser. Of that 39%, the purchase would have failed 61% of the time either for the trader’s refusal to serve the consumer’s Member State or for other reasons. The other reasons included the inability to provide payment options in the delivery Member State’s currency (VAT returns are payable in Euros or, if the Member State is not part of the Eurozone, the Member State’s national currency. Ten EU Member States do not use the Euro as their currency). See IP/09/1564, European Commission, 22 October 2009.

The results of the memo stand in stark contrast to the ideal of the common market; that goods may cross borders freely within the market without restrictions based on borders. Unsurprisingly, the EC is proposing multiple solutions to remediate the survey fi ndings. At the top of the list is a recommendation to further simplify the distance sale rules. The next proposal is an increase in the collection threshold to €150,000 and the removal of the provision that allows Member States to reduce the threshold. To date, none of the proposed changes have been implemented.

ConclusionOn the surface, the EU solution appears to solve the largest perceived inequality in the US between “Main Street” and remote retailers by eliminating the Quill


The War in CaliforniaOnline Retailers Push Public Initiative

Cass D. Vickers, CMI, Esq.IPT Deputy Executive Director and State Tax CounselPhone: 404.240.2300Email: [email protected]

CCalifornia, so often in the forefront on emerging public policy issues, fi nds itself again on the front line in a battle with Amazon and other

online retailers over the collection of California use tax. Readers are familiar with the U.S. Supreme Court’s interpretation of the Commerce Clause as limiting state tax jurisdiction to activities that have a “substantial nexus” with the state. Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977). And they are familiar with the Court’s celebrated holding, in Quill Corporation v. North Dakota, 504 U.S. 298 (1992), interpreting the “substantial nexus” requirement, in the context of sales and use taxation at least and arguably with other levies as well, as limiting the taxing authority to entities with a meaningful “physical presence” in the state. The ruling is predicated in part, on the substantial burdens that use tax collection on behalf of thousands of jurisdictions under divergent tax regimes would occasion to those doing business across state lines. The ensuing Streamlined Sales Tax Project was a response by a number of states, intended to reduce those burdens in hopes either of securing a reversal of Quill or authorization from Congress, under its affi rmative Commerce Clause powers, to tax Internet merchants. We have previously reported on pending congressional proposals with that objective, such as the Main Street Tax Fairness Act. See IPT Tax Report (May 2009).

In the absence of resolution in either of those venues, the growth of online retailing and pinch of declining state and local tax collections have prompted a number of jurisdictions to enact more aggressive interpretations of the “physical presence” requirement, a development we have also covered at some length in prior issues of the IPT Tax Report. Joining the fray with a trailer bill, A.B. X1 28, to its 2011-2012 budget bill, California has substantially expanded its assertion nexus over online retailers. In particular, the bill redefi nes retailers “engaged in business in this state” (and so required to collect use tax from in-state purchasers) to include

Sales and Use Taxthose with “click-through nexus” and those with defi ned associational or “affi liate nexus.”

As to the fi rst, retailers would be deemed to have substantial nexus with the state if “entering into an agreement or agreements under which a person or persons in this state, for a commission or other consideration, directly or indirectly refer potential customers of tangible personal property to the retailer, whether by an Internet-based link or an Internet Web site, or otherwise,” provided the resulting sales exceed $10,000 in the preceding 12 months and the retailer has, during the same period, cumulative sales to persons in California exceeding $500,000. Amending s. 6203 of the Revenue and Taxation Code (RTC). The fi rst part of the defi nitional change effectively asserts that such retailers are physically present in California through the persons referring business to them on the described Internet click-through link basis. The second part, limiting the nexus assertion to retailers with the specifi ed levels of sales, is presumably included for the purpose of accommodating the Commerce Clause requirement that the required nexus be “substantial.”

The other defi nitional change to retailers “engaged in business in this state” sweeps in all retailers that are “a member of a commonly controlled group [per s. 25105 of the RTC] and is a member of a combined reported group [per s. 25106.5 of Title 18 of the California Code of Regulations] that includes another member . . . that, pursuant to an agreement with or in cooperation with the retailer, performs services in this state in connection tangible personal property to be sold by the retailer,” including design and development and/or solicitation services. This change effectively asserts that retailers are physically present in the state through described affi liates performing services in California that relate to the retailers’ sales into the state.

The new law excludes from the nexus assertions the placement of advertisements with persons in the state to be delivered in print, by television or radio, Internet or other medium, unless the amounts paid for such advertising “consist of commissions or other consideration that is based upon sales of tangible personal property.” Furthermore, Internet advertising would not come under the click through nexus provisions of s. 6203(5)(A) “unless the person entering into the agreement with the retailer also directly or indirectly solicits potential customers in this state through the use of fl yers, newsletters, telephone calls, electronic mail, blogs, microblogs, social networking




sites, or other means of direct or indirect solicitation specifi cally targeted at potential customers in this state.” The apparent effort here is to constrain the nexus assertion to advertising arrangements which go beyond the placement of advertising and refl ect affi rmative solicitation activities on the part of the putative “agent” or “representative” of the retailer with which the advertisement is placed. The act is said to address “the fi scal emergency declared [by Gov. Schwarzenegger] and reaffi rmed [by Gov. Brown] on January 20, 2011” and is effective immediately as part of the Budget Bill (S.B. 87). Legal challenges are expected, based on Quill, and state constitutional provisions relating to tax measures.

Amazon and other online retail merchants have responded, by severing ties with California Web and backing a public initiative that would repeal that law and ban sales and use tax on Internet sales. Amazon has advised that the state Attorney General’s offi ce has approved its referendum petition. Tax offi cials have estimated Amazon’s current year exposure at approximately $83 million and project the collections for all affected retailers roughly $200 million. Use tax for all Internet sales into the state is estimated to exceed $1 billion per year.

Supporters of the referendum, including former Rep. George Runner, now a member of the State Board of Equalization, maintain that A.B. X1 28 will cost California jobs and investment. Opponents, including retailers with physical presence in the state, such as WalMart and Target, see the recently-passed legislation as leveling the playing fi eld, since online retailers would not be able to make sales free of the 7.25 percent state tax. They have formed the Alliance for Main Street Fairness which will oppose the referendum measure. That group is pushing measures in a dozen states that would require collection of tax on Internet sales by Amazon and similar companies. Retailers Push Amazon on Taxes, Wall Street Journal, Bustillo and Woo, March 17, 2011. The use tax on such purchases has always been due from purchasers, of course, but use tax obligations are widely disregarded by consumers and largely unenforced by taxing authorities, dealer collection on the state’s behalf being considered the only cost-effective approach available.

Initiative supporters will need roughly 505,000 voter signatures, which are expected, and the measure could appear on the next statewide ballot in February 2012. The stakes are high, with one Harvard Business School professor, Nancy F. Koehn, calling Internet retailing “the fastest growing distribution channel in

America.” Amazon Takes on California, New York Times, Richtel and Kopytoff, July 13, 2011. The legal issues, divergence of business interests, and large fi nancial interests—among retailers and on the part of states with pressing revenue needs—assures a vigorous and protracted battle.


Questions of the Month

W hat IPT schools will I be required to complete, and how are education points calculated?

Click on the appropriate link (Income, Property, Sales) to go to the online Orientation in your tax specialty for detailed information regarding the requirements to become an eligible candidate and for guidelines in calculating education points.

W hat if my application is reviewed and found to be short of education points?

You may submit additional education documentation to supplement your original application. Applicants are strongly encouraged to be liberal rather than conservative, when submitting education documentation for credit. Applicants MUST SUBMIT DOCUMENTATION TO IPT as they attend additional programs in order to update their eligibility status. This includes IPT programs. IPT program attendance is NOT automatically linked to CMI applications.

C an I submit education from training provided by my employer?

Yes, as long as it meets the requirements as described in the CMI Brochure, and proper documentation is provided.

D o you have a list of courses that are preapproved?

No, IPT reviews each course individually after a completed application is submitted.

More information on all of these announcements can be found on IPT’s website at www.ipt.org.

Help Us - Help You!

Your CMI designation is important, both to you and to us. Each year, IPT staff monitors and contacts any CMI who might be in jeopardy of

losing his or her CMI designation due a shortage of continuing education. CMIs that are in the last year of their term and who have not yet met CE requirements necessary to retain their designations receive several e-mails before their term expires, indicating the status of their designation and the requirements that must be met in order to retain their designation. It is important to make sure that IPT maintains your correct e-mail and contact information so that you will receive these timely e-mails.

Continuing Education submissions for non-IPT programs are processed within 4 weeks of receipt. Remember to attach the Application for Continuing Education Credit with each non-IPT course submitted. Each submission must be individually reviewed and coded before being entered into the CMI’s status report. IPT does not verify receipt of individual CE submissions unless requested to do so. Every CMI receives a copy of his or her status report via e-mail at the beginning of each year (and may also request a copy at any time by e-mailing [email protected] or [email protected]). The yearly report includes all CE that was received by December 31st of the calendar year just ended. Any unreported CE earned during the calendar year just ended must be submitted by March 15 in order for the credit hours to be added. CMIs who have met their required 60 hours of CE including 30 hours in their discipline with 12 hours earned at one IPT discipline-specifi c program and 5 ethics hours for the 5-year term, do not need to submit additional CE.

CMI CANDIDATECONNECTION

CMICORNER

Any questions regarding the CMI Professional Designation can be addressed to Christina Webb, Manager of Education and Certifi cation programs at [email protected] or Emily Archer, Certifi cation Specialist at [email protected].






2011 Sales and Use Tax Symposium ~ September 25 - 28, 2011Renaissance At SeaWorld®, Orlando, Florida

A topical outline of this year’s program follows. Please note that there are fi ve general sessions and 36 breakout sessions. Please go to IPT’s website, www.ipt.org, for full program and registration materials. Early registration for both the program and hotel are encouraged.

Breakout Sessions:■ Ask the Experts - FL, NC, SC, GA■ Ask the Experts - TX, CA, WA■ Ask the Experts - AR, KS, OK, MO■ Ask the Experts - PA, NJ, NY, MA, CT■ Ask the Experts - LA, MS, AL, CO, AZ■ Ask the Experts - WI, NE, IA, IL, IN, OH■ Audit Sampling: Avoiding the Wheels off Sample

Audits■ Automating the Sales and Use Tax Function■ Bad Debt Refund Claims: Getting Some Bang for

the Missing Bucks■ Beginner Basic■ Contracts and Other Transactions: How Can a Tax

Professional Assist and Add Value?■ Credits and Incentives - Overview of and New

Trends■ Don’t be Denied - Exemption Certifi cate

Validation ■ Get in Control of the Managed Audit and

Compliance Agreement Programs■ Google is not Synonymous for Tax Research:

Research Tools and Tips■ Hot Topics - Top 10 Cases in Sales and Use

Taxation■ How to Manage the Auditor: What is Required?■ Income Tax Applications to Sales Tax: Opportunities

and Pitfalls

■ Industry Discussions: Oil and Gas■ Industry Discussions: Leasing Issues■ Industry Discussions: Utilities■ Industry Discussions: Manufacturing■ Is the Sales Tax Simple in Streamline States? - A

Review of the SST Process.■ Legislative Efforts to Expand the Reach of the

Sales Tax ■ Oh Canada! - Overview and What’s New■ Old Tax Laws Applied to New Technologies■ Overcoming the Tax Language Barrier: Translating

Income Tax for Sales Tax Professionals■ Property Tax for Sales Tax Professionals■ Refund Roadblocks■ Sourcing of Services: Service Versus TPP,

Bundling, Allocating, Etc. ■ State Trends in Auditing■ Taxing Service as Tangible Personal Property, Can

the States Do It?■ This and That About VAT: A Comparison of US

Sales and Use Tax Principles with VAT Principles.■ Unclaimed Property: New Trends■ VDA’s and Amnesty Programs■ Where IT’S at: Software, Cloud Computing and

Data Processing

General Sessions:■ Ethical Dilemmas in the Tax World■ Federal Limitations on Sales Taxation■ Nexus and Reporting: Where we have been,

Where we are going

■ State of the States■ Utilizing Your Memory


Breakout Sessions:CIP: Real & Personal Property Valuation Issues• CMI Academy - Part I• CMI Academy - Part II• CMI Academy - Part III• Commercial & Industrial Transactions Since the • Crash, where do they go from here - Midwest Commercial & Industrial Transactions - Northeast • Commercial & Industrial Transactions - Southeast • Commercial & Industrial Transactions - West• Commercial Real Estate• Ethics in Negotiation • Fee Simple vs. Leased Fee - The Battle • ContinuesHotel Valuation• Implications of Commodity Prices on Industrial • Property Tax Valuations Is the Green Movement Creating Functional • Obsolescence? New Leased Accounting Rules & Implications for • Property Tax PurposesProperty Tax Incentives • Property Tax Reform - Legislative & Case Law • UpdateThe Art of the Appeal: Practical Tips for Negotiating/• Litigating Property Tax AppealsThe Graying Property Tax Profession - What are • we doing to bring new people in?Wind Energy Facilities Valuation and Taxation • Issues

Industry Roundtable Discussion Sessions:

Energy• Hotel & Healthcare• Industrial• Personal Property• Retail• Telecom/High-Tech•

If you are a CMI, you will fi nd that the half-day Academy session, which has been especially designed for CMIs, offers a thought-provoking and interactive forum. This group format, whereby experienced tax professionals participate in formulating effective solutions to problematic issues, ensures that those solutions refl ect a diversity of thought and analyses. All participants will have a hand in crafting the best practice answers.

You defi nitely don’t want to miss this year’s Symposium!

IPT Property Tax SymposiumNovember 6-9, 2011 • Hyatt Regency Monterey • Monterey, CaliforniaDon’t miss this opportunity to attend IPT’s annual Property Tax Symposium. This year’s Symposium promises to be another outstanding educational program. It will offer presentations on a number of property tax-related topics of importance to tax professionals functioning in today’s changing environment. You will not fi nd a more diverse, yet in-depth, program in the industry.

General Sessions:Common Misuses of Survey Publications for Cap • Rates & Discount RatesEconomy Presentation: Fast and Furious• Ethics Presentation: Prominence to Prison: Why • Smart People do Dumb Things

Ten Categories of Detrimental Conditions• The Nestlé and UTGR Decisions: Case Studies in • Challenging & Litigating Assessments of Unique Properties


Value Added Tax Symposium September 18 - 21, 2011

The Mason Inn Conference CenterGeorge Mason University

Fairfax, Virginia

This two and one-half day program provides focused education on VAT and its impact on multi-national companies and cross-border transactions. The program encompasses the economics of VAT through the potential implementation of VAT in the US. Along the way, the program will also provide presentations

and concentrated discussions on Regional Perspectives, Legal Standards, Compliance Automation and specifi c Industry Issues. Audience participation is strongly encouraged and while some working knowledge of VAT is suggested, the program is structured so that all attendees will gain valuable insights regarding VAT.

Brochure Registration Hotel Reservation

Intermediate Personal Intermediate Personal Property Tax SchoolProperty Tax SchoolOctober 16 - 21, 2011October 16 - 21, 2011Georgia Tech Hotel & Conference CenterGeorgia Tech Hotel & Conference CenterAtlanta, GeorgiaAtlanta, GeorgiaThis comprehensive course, which provides an in-depth investigation This comprehensive course, which provides an in-depth investigation of personal property taxation, is for individuals who have a basic of personal property taxation, is for individuals who have a basic knowledge of property tax issues. Topics include classifi cation of knowledge of property tax issues. Topics include classifi cation of property, valuation and depreciation of personal property, audits, and property, valuation and depreciation of personal property, audits, and appeals. Register now!appeals. Register now!

Prerequisites: Completion of the Institute’s (basic) Property Tax School Prerequisites: Completion of the Institute’s (basic) Property Tax School or three years of experience is recommended. Enrollment is limited to or three years of experience is recommended. Enrollment is limited to employees of member employees of member companies or government agenciescompanies or government agencies. .

Brochure Registration Hotel Reservation

Members may also register online. Members may also register online.


Income Tax SymposiumNovember 6 - 9, 2011

Hyatt Regency Monterey HotelMonterey, California

This two and a half-day state and local income tax symposium features general presentations as well as specialized

breakout sessions of timely interest to all state and local income tax professionals. The program, developed to emphasize practical applications of theories, techniques, and procedures to everyday situations, will be invaluable to state and local income tax representatives from all industries at all levels of experience.Registration materials will soon be avail-able on IPT’s website.

Credits and Incentives Symposium

November 9 - 11, 2011Hyatt Regency Monterey Hotel

Monterey, California

Identify Best Practices to help your business face today’s economic challenges by wisely utilizing tax credits and incentives.

This Symposium is the culmination of many dedicated efforts by experienced colleagues in the Credits and Incentives area to make this program effective, interesting, and, most importantly, informative. We hope you will make plans to attend and to join IPT in expanding and strengthening the educational opportunities for professionals in the credits and incentives field. Brochure Registration Hotel Reservation


CODE OF ETHICSCANON 11

IT IS UNETHICAL for a member, in the performance of a tax as-signment, to fail to exercise in-dependent judgment in advising and representing a client.

ONE-DAY TAX SEMINARS

Bringing TogetherBusiness Tax Professionals

MICHIGAN September 9, 2011Masco Corporation

Taylor, Michigan

Program Registration

GEORGIANovember 18, 2011

Crowne Plaza Ravinia HotelAtlanta, GA

Program & Registration available soon on IPT’s website

Appeals Due:FL* IL* NH RI* UT* WI* CA* 9/15 - Counties that mail notices by 8/1NY 9/1 Westchester (Court Appeals)PA* All counties not already listed UT 9/15*Dates vary, check jurisdiction

Personal Property Filing Dates: None

Assessment Dates: None

Property Tax CalendarSeptember 2011

This information is provided by International Appraisal Company (IAC) and is provided for quick reference/reminder purposes only. Nei-ther IPT or IAC makes any guarantee to com-pleteness or accuracy and is not responsible for errors or omissions or for any results from the use of this information.

Dates vary; users should confi rm dates for their jurisdiction.

Visit IPT’s website to plan your Continuing Education schedule for the remainder of the year or refer to the IPT 2011 calendar of events on this page to see what is being offered. The Institute’s programs are accepted by most organizations for continuing education purposes. Check with the administrator of your designation/certifi cation.

Do you needCEC/CLE/CPE credit?

(MAI, CPA, CMI, CAE, etc.)


Please visit the Career Opportunities page on the IPT web-site for complete position descriptions and requirements.

Ca r ee r sCa r ee r s

Positions Available:

Tax Manager, Property Taxes and Unclaimed Property #5076 (Nashville, Tennessee) - HCA. For more information about HCA, a complete job description, and to apply for consideration, please click the following link: http://www.careersathca.com/. Date Posted: 7/26/2011 (IPT031)

SALT Tax Associate (New York, New York) - Geller & Company. Send resume to [email protected]. Date Posted: 7/26/2011 (IPT030)

SALT Tax Manager (New York, New York) - Geller & Company. Send resume to [email protected]. Date Posted: 7/26/2011 (IPT029)

Sales Tax Accounting Supervisor (Atlanta, Georgia) - Chick-fi l-A, Inc. Qualifi ed candidates please send resumes to betty.hoffman@chick-fi l-a.com. Date Posted: 7/26/2011 (IPT028)

North America Payroll Tax and Compliance Manager (Seattle, Washington) - Amazon. Send resume to [email protected] Date Posted: 7/26/2011 (IPT027)

Tax Clerk (Bloomfi eld Hills, Michigan) - Macquarie Group. Please apply directly to our website via the link below: http://www.careers.macquarie.com/jobDetails. Date Posted: 7/26/2011 (IPT026)

Property Tax Analyst (Bloomfi eld Hills, Michigan) - Macquarie Group. Please apply directly to our website via the link below: http://www.careers.macquarie.com/jobDetails. Date Posted: 7/26/2011 (IPT025)

Property Tax Staff Position (Boca Raton, Florida) - Global Tower Partners. Send resume to Jason Raab at [email protected]. Date Posted: 7/26/2011 (IPT024)

Property Tax Supervisor (Tampa, Florida) - Pitney Bowes. Apply online at www.pb.com/careers - Job #111701 - Property Tax Supervisor. Date Posted: 7/22/2011 (IPT023)

Property Tax Accountant (Toledo, Ohio) - Pilkington North America, Inc. Send resume to [email protected]. Date Posted: 7/21/2011 (IPT022)

Tax Accountant (Richmond, Virginia) - Dominion. Visit www.dom.com, click “About Us” and then refer to the “Careers at Dominion” heading. All applicants must apply online. Date Posted: 7/20/2011 (IPT021)

Corporate Tax Manager (Bradenton, Florida) - Robert Half Finance & Accounting. Send resume to [email protected]. Date Posted: 7/20/2011 (IPT020)

Property Tax Supervisor (Tampa Florida) - Robert Half Finance & Accounting. Send resume to [email protected]. Date Posted: 7/20/2011 (IPT019)

Middle Market Tax Consultants (Sparks, Maryland) - SC&H. Send resume to [email protected]. Date Posted: 7/19/2011 (IPT018)

Middle Market Tax Manager (Sparks, Maryland) - SC&H. Send resume to [email protected]. Date Posted: 7/19/2011 (IPT017)

Income Tax Manager (Irving, Texas) - Consolidated Electrical Distributors, Inc. To Apply, go to http://www.applicantstack.com/client/cedjobs/x/detail/a2x16ezo7zle/aaai. Date Posted: 7/18/2011 (IPT016)

State and Local Tax Analyst (Irving, Texas) - Consolidated Electrical Distributors, Inc. To Apply, go to http://www.applicantstack.com/client/cedjobs/x/detail/a2x16ezfchgq/aaai. Date Posted: 7/18/2011 (IPT015)

Manager, Sales and Use Tax (Overland Park, Kansas) - SALT Solutions. To apply, please send resume and salary requirements by Email to [email protected] or Fax to 913.239.2417. EOE. Date Posted: 7/18/2011 (IPT014)











http://www.applicantstack.com/client/cedjobs/x/detail/




Sales/Use Tax Manager (Atlanta, Georgia) - The Wendy’s Company. To apply, please send resume and salary requirements by Email to [email protected]. Date Posted: 7/18/2011 (IPT013)

National Property Tax Opportunity (San Francisco, California) - Ernst & Young, LLP. For consideration, send your resume directly to [email protected]. Date Posted: 7/18/2011 (IPT012)

Tax Associate Analyst (Plano, Texas) - PepsiCo. Please send resume to eliane.fi [email protected]. Date Posted: 7/18/2011 (IPT011)

Tax Manager State & Local Tax, Income & Franchise Tax - Grant Thornton LLP. Send resume to [email protected]. Date Posted: 7/12/2011 (IPT010)

Accountant II, Tax Audits (Boca Raton, Florida) - Offi ce Depot. Qualifi ed applicants should apply directly to our website through the following link: http://www.offi cedepot.com/companyinfo/careers/search.jsp?jobreqnbr=1076776. Date Posted: 7/12/2011 (IPT009)

State Tax Analyst (Federal Way, Washington) - Tax Specialty: State Income Tax. Weyerhaeuser. To apply and submit resume, go towww.weyerhaeuser.com/careers, search for state tax analyst and select apply online. Date Posted: 7/7/2011 (IPT008)

Regional Market Development Manager (New York, New York) - Paradigm Tax Group. For consideration for this position, please email resumes to [email protected]. Date Posted: 7/6/2011 (IPT007)

Senior Managing Consultant/Managing Consultant Positions (New York, New York) - Paradigm Tax Group, Please send a resume to Oscar Diaz at [email protected] for consideration. Date Posted: 7/6/2011 (IPT006)

To submit a position announcement, email Toby Miller at [email protected]. Include the job title, city/state, and the Tax Specialty, i.e. Property/Sales/Income.









Sales Tax School I: Introduction to Sales & Use TaxesGeorgia Tech Hotel & Conference CenterAtlanta, GeorgiaFebruary 26 - March 2, 2012

ABA/IPT Income Tax SeminarThe Ritz-CarltonNew Orleans, LouisianaMarch 19 - 20, 2012

ABA/IPT Sales Tax SeminarThe Ritz-CarltonNew Orleans, LouisianaMarch 20 - 21, 2012

ABA/IPT Property Tax SeminarThe Ritz-CarltonNew Orleans, LouisianaMarch 22 - 23, 2012

Sales Tax School II: Theory & Practice for the Experienced Sales & Use Tax ProfessionalMarriott Kingsgate Conference CenterUniversity of CincinnatiCincinnati, OhioApril 22 - 27, 2012

Intermediate Real Property Tax SchoolMarriott Kingsgate Conference CenterUniversity of CincinnatiCincinnati, OhioApril 29 - May 4, 2012

Basic State Income Tax SchoolTBAJune 4 - 8, 2012

Advanced State Income Tax SchoolTBAJune 4 - 8, 2012

CMI - Income Tax ExamsRenaissance Esmeralda ResortIndian Wells, CaliforniaJune 22 - 23, 2012

CMI - Sales Tax ExamsRenaissance Esmeralda ResortIndian Wells, CaliforniaJune 22 - 23, 2012

CMI - Property Tax ExamsRenaissance Esmeralda ResortIndian Wells, CaliforniaJune 23, 2012

36th Annual ConferenceRenaissance Esmeralda ResortIndian Wells, CaliforniaJune 24 - 27, 2012

Property Tax SchoolGeorgia Tech Hotel & Conference CenterAtlanta, GeorgiaAugust 12 - 16, 2012

CMI - Sales Tax ExamsHyatt Regency MinneapolisMinneapolis, MinnesotaSeptember 28 - 29, 2012

Sales Tax SymposiumHyatt Regency MinneapolisMinneapolis, MinnesotaSeptember 30 - October 3, 2012

Intermediate Personal Property Tax SchoolGeorgia Tech Hotel & Conference CenterAtlanta, GeorgiaOctober 14 - 19, 2012

Texas Taxpayers and Research Association (TTARA)Hyatt Regency AustinAustin, TexasOctober 15 - 16, 2012

CMI - Income Tax ExamsKey Bridge MarriottArlington, VirginiaNovember 2 - 3, 2012

Income Tax SymposiumKey Bridge MarriottArlington, VirginiaNovember 4 - 7, 2012

Advanced Sales & Use Tax AcademyKey Bridge MarriottArlington, VirginiaNovember 4 - 7, 2012

CMI - Property Tax ExamsTampa Marriott Waterside Hotel & MarinaTampa, FloridaNovember 10, 2012

Property Tax SymposiumTampa Marriott Waterside Hotel & MarinaTampa, FloridaNovember 11 - 14, 2012

I P T 2 0 1 1 CALENDAR OF EVENTS

Please check IPT’s online Calendar of Events for additional programs that may be added.

I P T 2 0 1 2 CALENDAR OF EVENTS

Michigan One-Day Tax SeminarMasco CorporationTaylor, MichiganSeptember 9, 2011

Value Added Tax SymposiumThe Mason Inn Conference Center & Hotel George Mason University Fairfax, VirginiaSeptember 18 - 21, 2011

CMI - Sales Tax ExamsRenaissance Orlando at SeaWorldOrlando, FloridaSeptember 23 - 24, 2011

Sales Tax SymposiumRenaissance Orlando at SeaWorldOrlando, FloridaSeptember 25 - 28, 2011

Intermediate Personal Property Tax SchoolGeorgia Tech Hotel & Conference CenterAtlanta, GeorgiaOctober 16 - 21, 2011

CMI - Property Tax ExamsHyatt Regency Monterey HotelMonterey, CaliforniaNovember 5, 2011

CMI - Income Tax ExamsHyatt Regency Monterey HotelMonterey, CaliforniaNovember 5 - 6, 2011

Income Tax SymposiumHyatt Regency Monterey HotelMonterey, CaliforniaNovember 6 - 9, 2011

Property Tax SymposiumHyatt Regency Monterey HotelMonterey, CaliforniaNovember 6 - 9, 2011

Texas Taxpayers and Research Association (TTARA)Hyatt Regency AustinAustin, TexasNovember 7 - 8, 2011

Credits & Incentives SymposiumHyatt Regency Monterey HotelMonterey, CaliforniaNovember 9 - 11, 2011

Georgia One-Day Tax SeminarCrowne Plaza Ravinia HotelAtlanta, GANovember 18, 2011

tax report - alston & bird · ipt august 2011 tax report 3 president’s corner i look forward...

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